Quadient SA

PAR:QDT

Earnings Call Transcript 2019-Q3

[Operator]

Hello, and welcome to the Q3 2018 Sales Call. My name is Courtney, and I'll be your coordinator for today's event. [Operator Instructions]I will now hand you over to your host, Geoffrey Godet, to begin today's conference.

[Jean-François Labadie]

It's -- sorry, Jean-François Labadie that will start. So thank you. Good evening and welcome to our 2018 Q3 Sales Conference Call. I am Jean-François Labadie, Neopost's CFO. I am together with Geoffrey Godet, Neopost's CEO; 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 Q&A session. If you ever research through our webcast modules, 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. As you know, we are currently involved in a deep strategic review. Our new strategic plan will be presented on the 23rd of January. During this transition year, however, we remained fully focused on operating our current business portfolio in the most effective way. And as you can see, on this chart, we achieved another relatively good performance this quarter. Our total sales were up 0.8% to EUR 265 million. We have lower scope effect this quarter. As opposed to the first 2 quarters, we benefited from a positive currency effect of 0.6%. And more importantly, we recorded a small organic growth of plus 0.2%. In a nutshell, this is thanks to the double-digit organic growth achieved by our Communication & Shipping businesses as a whole. In the meantime, Mail Solutions declined organically by minus 4%, that is to say at the high-end of the historical range that we have experienced over the past few years. We are obviously quite pleased with this achievement. But this is not changing our trajectory for the full year. Indeed, we are confirming all the indications that we gave earlier. You can now switch to Slide 4. Slide #4 provides a good overview of the breakdown of the organic growth per business unit. SME Solutions came at minus 1.7%. I remind you that SME Solutions include Mail Solutions, graphics as well as digital communication and shipping solutions dedicated to our SME client base. Enterprise Digital Solutions is back to double-digit growth, increasing by 12%. And Neopost Shipping increased by 12.6%. The combination of double-digit growth both in Enterprise Digital Solutions and in shipping has more than offset the decline in SME Solutions. This is how we achieved another positive organic sales growth in Q3 of plus 4.2%. I now hand over to Geoffrey for a more detailed review of our Q3 sales performance of business units. You can turn to Slide #5.

[Geoffrey Godet, CEO & Director]

Thank you, Jean-François. Good afternoon, everyone. Happy to be with you. So let's start the business review with Enterprise Digital Solutions division on Slide #5. As you know, Enterprise Digital Solutions represent around 13% of the group total sales. As you can see on this chart, the third quarter confirms that we have been back on track since the beginning of the year. Indeed, we have seen some continuous progress after the poor performance achieved last year for the second semester, in particular, in Q3 and Q4. And therefore, our organic growth in the third quarter has reached 12%. Let's now move to Slide #6. The bulk of the Enterprise Digital Solutions division is Customer Communications Management software, what we call CCM. As you know, we have engaged at the beginning of the year, a process that can assist in refining our commercial approach. We started to introduce a more phased approach to license sales to avoid mainly the difficulty of selling large software deals upfront. We also made several changes with a new head -- I'm sorry, we also made management changes, several of them, with the new head of North America, appointed at the beginning of the year. And more recently, a new head of our Northern Europe region, appointed a few months ago. We continue to adapt our sales force to address new vertical industries, like healthcare on top of financial services and insurance verticals, and this process is still ongoing. So, CCM recorded a 15% organic growth in the third quarter. We are not overoptimistic about our performance because we benefited from an easier base of comparison in the third quarter. Nevertheless, our efforts have started to pay off. We didn't sign any large deal in Q3 and since the beginning of the year, but we signed several midsized deals. Among them, for instance, we signed a couple of healthcare clients in the U.S. recently in the third quarter. These deals contributed to achieve growth in new license sales this quarter for the first time this year. On top of this, as our customer base has continued to increase, we're enjoying a sound growth in the recurring revenues, that is to say, in revenues related to maintenance and services. So to complete the review of Enterprise Digital Solution division, a short comment on debt equity team. Debt equity team represent a smaller part of the business unit, as you know, and it continued to decline, although, at a lower pace with the organic drop of minus 1%. So in conclusion, overall, Enterprise Digital Solutions increased organically by 9% in the first 9 months of the year. And we continue to expect organic growth to reach, as mentioned before, a high single-digit for the full year 2018. We can now move to Slide #7. So let's talk about our shipping division. Shipping -- Neopost Shipping division represents around 6% of our total sales. And as you could see on the chart, our historical performance has proved rather volatile from one quarter to another. This is a direct reflection of the mix between the various businesses that make our shipping division. And these businesses include, as you know, some pure hardware sales businesses like the automated packing system, our CVP-500, the parcel lockers business, which generates a high level of recurring revenue and a wide variety of software businesses. Let's now move to Slide #8. So as expected, the third quarter, our Q3 organic growth was lower than the first 2 quarters, and reached 13%, almost. This is, however, reflected in different trends. Packcity revenues were up 120% organically versus the last quarter last year -- sorry, the third quarter last year. This is mainly due to the rental revenue generated by installed base of parcel lockers in Japan. As anticipated, the rate of new lockers being installed has gone down to move around roughly 80 new lockers per month this quarter. But we benefited from the full impact of the sharp increase of the installed base over the last 15 months. Thanks to our ownership with Yamato, this installed base in Japan has went up from 600 lockers at the end of July 2017, as a reminder, to 3,400 lockers at the end of October 2018. We also benefited from the delivery of a few personal lockers to Australia Post in Australia as well as a few more lockers delivered in France and in the U.S. this quarter. Regarding the CVP-500, our fit-to-size packing system. We sold 2 new machine in the third quarter, which is the same number as in the third quarter last year. That being said, the revenues were, however, slightly down compared to the third quarter last year. And finally, let's talk about our Shipping software. Revenues from Shipping software went further down in the third quarter, with an almost an 8% organic decrease this quarter. So as a reminder, Shipping softwares is a mixed bag of various products, such as ProShip in the U.S., track-and-trace softwares, RFID solutions, Temando, et cetera. Some of the legacy software are being gradually phased out as we explained before. And this explains the decline in revenue in that -- in the segment.Overall, we continue to expect Shipping to grow organically at double-digit for the full year 2018, though at a much lower pace than in the first 9 months of the year. The organic growth of the first 9 months stands at 18.5%, currently. Let's move to SME Solution on Slide #9. SME Solutions represent around 81% of the total group sales. As you can see on this chart, despite our effort to grow our business outside the Mail Solution, the overall performance of this business unit remains strongly correlated with that of Mail Solution. The historical trend in the organic structural decline in Mail Solution stands within the range of minus 4% to minus 6% on a yearly basis. It does, however, fluctuates from one quarter to another one. So after the surprisingly good second quarter at minus 2.8%, we did minus 4% in Q3, and that is to say the high-end of the historical range. Within our SME non-mail-related business, the system growth in digital communication software and Shipping Solution has been mitigated for some time now by the decline in graphic activities. We are now turning to Slide #10. So Mail Solution continue to represent the bulk of our SME division. As I said, after the surprisingly good second quarter at minus 2.8%, Mail Solution decreased organically by 4% in the third quarter. North America continues to more be resilient and achieved a much lower decline compared to Europe. In Europe, the Mail Solution continued to decrease at a similar pace than in previous quarters, with some difference from one country to another as usual. Over the first 9 months of the year, the organic decline in Mail Solution stand at close to 4%. We remain, however, very cautious for the end of the year. We should end up the year within the historical range of minus 4% to minus 6%. Now in graphics. I'll remind you that we lost a large contract in Australia in the third quarter last year. This has accelerated the decline of this business over the last 4 quarters. In the third quarter this year, the decline was much lower at minus 3%. Moving to Digital Communication & Shipping Solution, dedicated to our SME client base, continued to do well. It achieved another strong performance in Q3 with a 21% organic growth compared to the third quarter last year. This good performance is due, in particular, to the continued success of our Customer Communications Management systems as well as our dematerialized electronic Mail Solutions. In the first 9 months of the year, SME Solution recorded a 2% organic decline. Over the full year, the growth in Digital Communication & Shipping Solutions will not offset the decline in Mail Solutions and in graphics for this division. We obviously continue to expect an organic decrease in SME Solution as a whole. So this ends our business review per division. And now I hand the floor back to Jean-François, and we could move to Slide 11.

[Jean-François Labadie]

Thank you, Geoffrey. Just a few more comments from my side. Slide 11 gives you a quick overview of our performance third quarter this year. Minus 2.1% in Q1, plus 1.2% in Q2, and plus 0.2% in Q3. This added to a virtually flat organic growth over the first 9 months at minus 0.2%, as you can see on the next slide. We are now on Slide #12. First 9 months sales are down 3.5% to EUR 792 million. This is essentially due to currency effects, even if the currency impact turned positive in Q3. We can now switch to Slide #13. We are showing here the 9 months sales breakdown. First, by activity. Communication & Shipping Solutions altogether grew organically by 9.5%, and now represents 30% of total sales. Second, by revenue type. You can see that recurring revenue has grown further and now represents 71% of total sales. Last, by geography. North America is organically up by 1.6%, and now represents almost as much as Europe. Let me finish with the Slide #14 to remind you our confirmed indications for the full year. We are still expecting a sales organic decrease for the full year. Revenue indications per division are as follows: We still expect Enterprise Digital Solutions to grow at high single-digit. Neopost Shipping will grow at double-digit, but well below our 9 months 2018 performance. The growth in parcel locker business will continue in Q4 but at a lower pace. I also remind you that we have placed full automated packing systems in Q4 2017, and we might not be able to place as many in Q4 2018. And finally, we will continue to experience a further decline in shipping software. As for SME Solutions revenue, we maintain our view that Mail Solutions should continue to follow the historical trend within a range of minus 4% to minus 6%. Digital Communications and Shipping Solutions, dedicated to SME will continue to grow at double-digit. And lastly, we expect further decline coming from our graphic business. Finally, we also confirm that the group EBIT margin for the full year should be above 17%. The Enterprise Digital Solutions will generate a higher margin in H2 than in H1. Thanks to a good control over our operating expenses, the SME division should produce a similar level of EBIT margin in H2 as in H1. The Shipping division's EBIT margin should remain at the same negative level in H2 as in H1. And in addition, I'll remind you that we expect an increase in innovation expenses in H2 compared to H1. In the meantime, we confirm that our expected -- we are expecting a high generation of operating cash flow. This ends the review of our Q3 performance. Before moving to the Q&A, Geoffrey, you wanted to make a couple of additional comments?

[Geoffrey Godet, CEO & Director]

Yes, thank you Jean-François. As I have the opportunity, I just wanted to remind everyone that we recently made a few changes regarding the Neopost's governance. At the board level, the board has decided to merge the Appointments Committee and the Remuneration Committee on the one hand, and to create a Strategy and Corporate Responsibility Committee on the other hand. At the leadership level, we also made a few changes. We created a new position of Chief Strategic Initiatives Officer, a position which is filled by Brandon Batt. Henri Dura, the former Head of Enterprise Digital Solution, has moved to another newly created function, that is of Chief Strategic, Marketing, Product, Technology and Supply Chain Officer. Dennis LeStrange, the Head of our SME Solution division, is due to leave in January. This was a long-planned departure.Consequently, I have decided to take direct responsibility for both the Enterprise Digital Solutions and the SME Solution divisions. These views reflect our commitment to conduct an ongoing assessment of our strategy on the one hand as well as to have a more integrated approach across the group. I will obviously tell you more about our future organization during our Capital Market Day in January. Thank you for your time. And we are now ready to answer any of your question, Jean-François and I.

[Operator]

[Operator Instructions] Okay, we do have a question coming through from the line of Martin Boeris, calling from Exane.

[Martin Boeris, Analyst of French Mid Caps]

I have two questions. One on Quadient and one on the CVP-500. So first on Quadient. Would you say your good performance this quarter is mainly owing to a favorable base effect? Or are you seeing more structural business improvement here? And second, you reported 2 new CVP-500 sales, could you tell us if they are repeat orders? And what's the profile of clients?

[Geoffrey Godet, CEO & Director]

So on Quadient, for the -- yes, two questions actually on Quadient. I will confirm that, yes, we did had a lower comparison, an easier one. As you know, our Q3 last year was flat. And we did take that into account. That being said, I guess, I also want to share with you along the way the year, we are making constant change to our businesses in terms of the sales approach, in particular. And I explained that we should expect some continuous improvement, which means that we will be moving by, and that we could see the progress that we're making quarter-after-quarter, and it will take several quarters to pay off. And in Q3, we have continued to see some improvements compared to Q2 and compared to Q1 in our sales performance. So on the CVP-500. We sold 2 in the U.K. to the same customer. It's a new customer, it's not a repeat order that we -- from customer that have reached in the past for the CVP-500. And it's a customer for dealing with logistic activity for the retail.

[Operator]

We currently have no further questions coming through. [Operators Instructions] We have another question coming through from the line of Nicolas Tabor, calling from MainFirst Bank.

[Nicolas Tabor, Analyst]

I had a few questions. So first on graphics solutions. Do you think we're still at risk of further strong decline? Or should it stabilize through this kind of organic decline level? Then if we look at Packcity. So Q3 was more or less in line with Q2. You said we have more revenue from rents. Should we expect Q4 to be in line as well? Or should it be down compared to Q2 and Q3 in terms of organic growth? And then, sorry, I didn't quite hear you, could you say again what was the new pace of installation in Q3 for Packcity? And can you repeat again the latest change in management at the head of EDS?

[Geoffrey Godet, CEO & Director]

Okay. So on the graphic, the main difference from the first -- the last 4 quarters actually, and this third one, was the comparison basis, since we lost a large contract in Australia. So this is why we see a difference in the pace of the decline. That being said, the graphic has been a declining activity for us for quite some time. So we continue to expect some decline. But, yes, at a much lower pace. So that was for the graphic. On Quadient, just going with different order. The latest change in Quadient is the Head of Quadient. Henri Dura is now picking a group function to oversee Strategic Marketing, Products, Supply Chain and R&D across the group as -- and this will cover as well Quadient as well as the SME division and the Shipping division. Below that, we had made some changes in the sales organization constantly during the year. Some of the ones that we shared together, like the Head of North America, and I was now -- I believe, we shared that in Q2. And more recently, in Q3, I believe, we made also a change in the Head of Sales for the Northern region in Europe. So that's the 3 change that I referenced during this call. For Packcity, yes, I do confirm that we did install on average, in Q3, 80 lockers more in Japan per month. And then as it relates to the growth rate that we anticipate in Q4, yes, we do anticipate that it will continue to be lower growth in Q4 compared to Q3 and the rest of the year.

[Nicolas Tabor, Analyst]

And could you -- so could you also confirm one thing to me? So you said that we'll get an update on January in terms of your position at EDS and SME, but would you consider these CEO position -- I mean COO position for these 2 segments to be able to stay merged, with the only 1 person responsible for the 2? Or then would you still see it as 2 different seats in the organization?

[Geoffrey Godet, CEO & Director]

This is an answer that we'd be very happy to be able to respond to you at the end of January, January 23, because obviously the organization should be in line with the new announcement that we have on the strategy.

[Operator]

We currently have no questions coming through. [Operator Instructions] Okay, we have no questions coming through on the line, so I shall hand you back over to your hosts.

[Gaële Le Men, Corporate & Financial Communication Director]

Yes. On my side, on the webcast, I have two questions. The first one relates to the CVP-500. So 2 machines were sold in Q3. It's the same number as in Q3 last year. But still there is a decline of 7% in the revenue. So why is that? Is it due to pricing pressure?

[Geoffrey Godet, CEO & Director]

So we are keeping at the same amount of machine from one quarter to another. As you can imagine, we do have a list price for each of those machines. We do have some times differences from one region to another. But as a regular and [ longer ] part of doing business, those prices could vary slightly. We're talking about a very small amount in absolute value. So we don't consider that meaningful. It could have gone one way or the other, it's the same numbers of machine from one quarter to the other. The percentage of decline is not relevant.

[Gaële Le Men, Corporate & Financial Communication Director]

Yes. I have a second question. It's relating to the Mail Solution business. It's about the installed base of franking machine and sold. So the question is, out of the installed base of franking machines developed in 2018 versus last year, is it an increase or a decrease in the installed base of franking machines?

[Geoffrey Godet, CEO & Director]

So I do not believe we share numbers on the -- numbers of installed base from one quarter another one. This is -- on the other hand, say that it is of crazy interest for me. So I'll be happy to give you some more and more input on our customer base at the Capital Market Day for each of our 3 divisions, by the way. That being said, I would just point out in the quarter that our recurring revenue has been increasing for the Mail business this quarter. I hope I addressed this question as well.

[Gaële Le Men, Corporate & Financial Communication Director]

Courtney, do you have more questions on your side?

[Operator]

We still have no questions coming through.

[Geoffrey Godet, CEO & Director]

I think that should conclude our quarterly sales call. Thank you, everybody, for attending, and I hope we addressed your questions. Thank you.

[Gaële Le Men, Corporate & Financial Communication Director]

And we'll meet on the 23rd of January in Paris, I hope. So you will receive the details of the invitation in due time. Thank you for being with us tonight. Bye-bye.

[Geoffrey Godet, CEO & Director]

Thank you. Bye-bye.

[Jean-François Labadie]

Thank you. Bye-bye.

[Operator]

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