Loomis AB

STO:LOOMIS

Earnings Call Transcript 2018-Q1

[Operator]

Good morning,

[Patrik Andersson, CEO, President & Director]

Good morning. My name is Patrik Andersson, I'm the CEO of Loomis. And today with me here on the call, I have Anders Haker, who is the CFO of Loomis. So welcome to the first quarter presentation.This is the content of today's presentation. We turn to Page 2. We go through the highlights of the quarter. We look at the different segments. We take you through the financials. And then of course, at the end, we have the Q&A session, where both myself and Anders will ask any questions you might have.Let's then turn to Page 3. And these are the highlights of the quarter. I'll come back to many of them during the next couple of slides. But just to summarize, we had a real growth of 8%, which we think is solid and good. We had a organic growth rate of 3% versus 3% last year. We had a very strong growth in the U.S. and we have a bit weaker growth or actually negative growth in Europe, but that's due to the workday impact due to Easter mainly, but also some other effects. The operating margin was 10.5%. And if you compare it to last year, it was a bit down, but that's due to restructuring cost in France and Sweden but also due to fewer working days. At the end of the P&L, we can see that EPS improved 10% to SEK 4.22 versus SEK 3.85 last year. And the operating cash flow was at 57%. We have, in the beginning of the year, done 2 acquisitions. We talked about that during the Q4 presentations, but it's worth mentioning again that we acquired KÖTTER in Germany; it's a #3 player in the German market, and we are very happy to enter one of the biggest cash countries in Europe of course. But we also acquired Sequel diamonds and jewelry business, which is based in New York; and that's now going to be integrated into our business in the United States. We have also won a new contract in France. So I'll talk a bit more about that at a later stage, but it's encouraging to see that our strategy to offer more value-added products and move up the value chain, as we say, offering more complex and -- products and services with more technology is working.Now I turn to Page #4, where we have a look at the operating margin. As I mentioned before, the operating margin was at 10.5%. And as you can see, we had, in 2017, a really big jump in the first quarter from 9.3% to 10.8%. Of course, that's a very high benchmark. But we'll talk more about the composition of the margin in a couple of slides later here.I then turn to Page #5, looking at the operating margin from a different angle. Here it's a 12-month rolling operating margin and it ended at 12.5%, which is -- 12.1%, excuse me, which is exactly the same number as we had when we went out of 2017.I go to Page #6, and here you can see the different segments. We're going to talk about USA, Europe, and then International.I turn then to Page #7, and talking a bit about the organic growth in the U.S., which was very strong 8%. We had growth in all lines of business. In CIT, we grew by 4%; and in CMS, we grew at 7%; and SafePoint, as you can imagine, we had a very strong growth, 18%, and that's then adding up to 8% in total. SafePoint accounted now for 13% of the total revenue, up 1 percentage point versus same quarter last year. And we are increasing volumes and market share. We see that we are winning smaller and more mid-sized customers and contracts, and that's helping us also on the profitability side, because this is quite easy to assimilate that volume into our existing branches; and it's not disturbing the efficiency of the branches that much than bigger contract is doing. And we're also gaining volume from existing customers, where we today have a split contract with one of our competitors and we see that some of that volume is coming to us. And we also had a strong pipeline of new potential customers that we are negotiating with. So on the top line side, a very good quarter in the U.S.We then turn to Page #8, and looking at the SafePoint sales. SafePoint sales, as I mentioned, we are now at 23,655 SafePoints installed. And again, let me be really clear on this, what we measure is the new net installed SafePoints. We had 880 new installed in the quarter, and that's a bit lower than the run rate we want to have. But on the other hand, we had 855 (sic - see slide 8 "854") refreshed or extended contracts, where we have a existing customer, which is having the concept; they have had it for some years, and then they want to extend and continue with the contract, which in itself is a very good thing, because that proves the efficiency and the stickiness, if you like, of the concept. So what we're doing right now is we are expanding or extending the sales organization in all aspects to be able to continue to push SafePoint in the U.S. And we had a very strong pipeline of new customers and the customers we are negotiating with. So we have good hopes for 2018. We are now over 2,700 customers and more than 200 provisional credit banks. So we are now gaining even more momentum on the U.S. market when it comes to SafePoint.Now I turn to Page #9, and looking at the margin. Margin was then up to 14% in the quarter, up from 12.6%. And we have, of course, increased share of high margin services. We are doing more SafePoint, more CMS; and that in itself is of course pushing the margin. But also we have economies of scales, due to higher volumes in CMS and more SafePoint units of course. And then also then improved efficiency when it comes to CIT; higher density, better efficiency when it comes to rooting, routing and so on. So -- and then also, we have a continued focus on branch efficiency and we see that many of our large branches are improving their profitability, due to the facts that I mentioned before, the better mix but also the higher volume. So many of our U.S. branches are performing on a very high level. We are continuing to increase investments into facilities, into IT, to be able to continue to grow and to handle higher volumes also in the future.I'll turn then to Page #10. Just looking at one of the points I just mentioned that CMS volumes are increasing, and as a percentage of the total, it's now up to 33%, and you can see that the trend has been growing since 2008 actually. And this is very encouraging to see of course.I then turn to Page #11. Talking about Europe, we had organic growth of minus 1% versus plus 1% last quarter. We see that many of our European countries are performing very well when it comes to the top line. So we have Spain, which is growing despite having less working days; Portugal is also growing 7%; Turkey is growing 26%; Argentina growing 57%, and actually now we can add Austria to the -- one of the countries growing, growing more than 5% in the quarter. And I would also like to mention U.K., which is even though on a lower level, continued to grow. So many of the European countries are growing at a good speed. We have also positive developments when it comes to SafePoint in Europe. We are selling more and more SafePoints. We are bit careful with mentioning the number, but we have especially positive development in France and Spain, where the [indiscernible] is now gaining momentum. And that's very much in line with the strategy to really to push SafePoint also in Europe. We had a negative workday impact as we had less invoicing days, and that is especially when it comes to big countries like France but also other European countries having a negative impact. In France, we had lower volumes due to the contract losses. I've been talking about that a lot during the last call for quarters, and we are now working a lot with, of course, to meet that challenge; and we're doing a lot of progress. Also when it comes to Sweden, we have lower volumes and that's because we had, last year, the note and coin exchange program, which we are now meeting. And of course that creates a big, big jump down when it comes to the revenue in Sweden. The operating margin was at 9.6% versus 11.4%. And again, as I mentioned, a negative workday impact is, of course, then also impacting the margin and the profitability. We have quite substantial restructuring programs in France and in Sweden. And just to give you a couple of numbers, we are reducing the workforce in France with 150 FTEs; we are reducing the workforce in Sweden with 140; and we are a good way through those programs as we speak. And we think that by the end of the summer, by the end of Q2, we should be gaining momentum from those programs. And then if you adjust for the workday impact, restructuring cost and also the acquisition in Germany, which is then diluting the margins at least right now, the margin in Europe is in line with last year.If we then turn to Page #12 and look at international business. The organic growth was 0% versus plus 2% last year. But we see that at least the markets for cross border transports, the forwarding business, is more stabilized now than it was during 2017. We also see positive trend for the storage business. We stored in gold and other valuables for our customers and we see that, that is now picking up again. I'm happy to say that the operating margin was improving in the quarter to 7.7% versus 4.6% last quarter or the same quarter last year; and then the improvement is really driven by the storage business. But also we have done a better mix, when it comes to shipments of forwarding business in general. So better margin, better deals with the forwarding businesses we are doing. And also we have worked a lot with the costs. When it comes to international, we see also the effect of a -- of better cost management. And we have a number of integration projects, as we have mentioned before, in the U.K. and U.S.; and they are going according to plan, where we really combine the international business and the local Loomis operations; and we're really happy to see that, that is working out fine. And we also have lot of activities when it comes to the D&J business, which we are now pushing a lot, especially when it comes to United States.I turn to Page 13, and we are looking at the financials, and then I turn then to Page 14 directly. Here you see the P&L basically. I just wanted to mention 2 parts of that: revenue of SEK 4,486,000,000 and the real growth of 8%. And that is important for us as we have now a target to reach SEK 24 billion by 2021; we have also to grow inorganically. So that's -- that for me at least a good and encouraging number to see that the total business is growing. And then finally, at the bottom, we see that the EPS is growing 10%. Those are the things worth mentioning when it comes to the P&L.So that's basically it from me and I'll leave it to Q&A. And operator, do we have any questions on the line?

[Operator]

[Operator Instructions] With the questions here, the first one is from the line of Aymeric Poulain.

[Aymeric Poulain, Head of Support Services Research]

Yes. There are 4 questions, if I may. The first one is on the margin of [ 15% ] America, very strong display in the first quarter. How sustainable do you think this progression is, especially given some of the investments you mentioned on the sales and marketing side That's the first question. Also on the SafePoint, you said there was a bit of slower pace of the installation in the last few quarters, but could you reiterate your plan for 2018 in terms of the run rate of this investment and also in terms of CapEx spend that may -- that is -- it involves? And on the U.S. again, G4S obviously has made -- given some color on the impact of some of their CASH360 cash recyclers in terms of savings for some of the key customers. And I wondered if some of these big box retailers are adopting this machine, how impactful it could be for your CIT business going forward in America? And last but not least, on the European side, you mentioned a number of factors impacting the margin and the organic growth, but you did not quantify them. So could you provide a more clear classification of the calendar effect and the other moving part affecting the European margin, please?

[Patrik Andersson, CEO, President & Director]

Okay. So I'll start off. So how sustainable is the U.S. margin? I mean, to be totally frank with you, I mean the -- what they have performed during the first quarter is a bit above or above expect -- our expectation. So the underlying businesses in the U.S. is stronger than we anticipated, so put it like that. So I have said before that we should see not as much margin expansion in the U.S. as we have seen previously. It's a bit too early to change that right now, but I just give you the -- our take is that the underlying business for Loomis in U.S. is stronger than we anticipated, so let me just put it like that. The other point is SafePoint. We still are of the opinion that we can make 5,000 SafePoints this year new -- net new installations. So we haven't changed that. We have a very strong pipeline of customers now that needs to be contract signed and everything, but we still think that, that is -- that target is doable. I'll leave it to Anders to talk about the CapEx in a short while. But then just to mention the recyclers and the 360, it's -- you're right, it's -- there is a demand for these type of recyclers in the U.S. market, and we have of course seen that. So we are actually launching our own recycling concept by the end of this year to follow our [ culture ], to meet the needs of our customers. And I think that, that is a natural part of -- to extend our offering when it comes to intelligent machines from SafePoint to recyclers. We should know that the customers for recyclers are a bit different. It's bigger retailers which have a certain amount of cash. So it's a slightly different customer profile under the SafePoint customers. So I'll leave the CapEx question and the EU margin question to Anders, who will answer that.

[Anders Haker, Chief Financial Officer]

Yes. Okay, Patrik. When it comes to the SafePoints on the CapEx program in the U.S., it will not have a significant impact on our cash flow since most of the new SafePoints in the U.S. are leased, and we are on a leasing program, and so it does not have an impact on the cash flow. I'm not saying that all of them are leased but the clear majority are leased. And when it comes to the drop of the European margins, we're not going into the details exactly of the restructuring programs and how much they cost, but what we want to communicate that -- is really that the underlying business in Europe is progressing according to plan, and is at least on the same level as last year or even better. That means that you -- basically you need to back out France and Sweden, and as well the less working days in Europe. And also what Patrik mentioned in -- when he went through the slides that the acquisition we made in Germany is margin dilutive, so that has an impact as well. But underlying is still around [ 11.4% ] for the first quarter.

[Aymeric Poulain, Head of Support Services Research]

But given the fact the calendar effect, for example, will reverse in Q2, you don't provide any color on the reversal effect that we may have to expect for Q2?

[Anders Haker, Chief Financial Officer]

No, we don't do that. But it's going to help the margins, of course, in Q2.

[Operator]

The next question is from the line of Mikael Holm.

[Mikael Holm, Analyst]

Yes. First a question on the U.S. Back on the Capital Markets Day last year, you showed a slide that basically pick up rates, inflation adjusted was moving upwards. Could you comment a bit about this [ thought ] in terms of price increases? Is that the main driver of the margin uplift currently?

[Anders Haker, Chief Financial Officer]

I mean, we are working very strongly with having efficient price increase programs in the U.S. and it's related to -- we believe that if we can deliver good quality and keep the customers happy, they will as well be willing to pay premium prices for our services. So that's of course part of the organic growth, but we will not go into the details, exactly how much that is contributing. But we need to -- as well to cover up the underlying wage inflation, which we currently have in the U.S. And I think we're doing a fine job there and we are protecting the margin and actually boosting the margins by increasing quality, and thereby, increasing the prices as well.

[Mikael Holm, Analyst]

And could you say something about the dynamics on when this is happening? Is it normal that it happens during the -- I mean, in the beginning of the year that you raised the annual price, or is it more, I mean, customer-by-customer?

[Patrik Andersson, CEO, President & Director]

No, it's on an annual basis, Mikael. And it happens usually 1st of January each year. For all the countries, that's a general rule of thumb.

[Mikael Holm, Analyst]

Okay. And then I guess it's fair to assume that you will have a quite nice tailwind for the coming 3 quarters from this price increase system?

[Patrik Andersson, CEO, President & Director]

Yes, they will -- I mean, that will continue. But you should bear in -- just to add some more flavor on that, that in the U.S., it works on the wage inflation. When you have annual increases, it's on a contract by contract basis. So that's not always correlated to the 1st of January, which is the case in other countries, for instance.

[Mikael Holm, Analyst]

Okay. And just a clarification on Europe. The restructuring that you have done in Sweden and France over the latest 2 quarters, are they now finalized?

[Patrik Andersson, CEO, President & Director]

Not yet. We -- as I said, we are about like 75% to 80% through those programs. So we have some more to be done during the next couple of months when it comes to reducing the workforce at least. But in Sweden also, we have announced that we're going to close down a number of branches, and that's going also to -- been announced, but it's also going to take place. So there's several activities and we are 75% to 80% through that, I would say.

[Operator]

The next question is from the line of Daniel Thorsson.

[Daniel Thorsson, Research Analyst]

Yes. I can start off with 2 questions. Regarding the market share gains in the U.S., is that mainly from Brink's, or any smaller competitors leaving the market? And [Audio Gap] yes, you can talk first.

[Patrik Andersson, CEO, President & Director]

I'll take that. I have a short memory, so it's better I take it one by one. When it comes to market share, it's quite clear that we are taking market shares from our biggest competitor, Garda and Brink's. That's at least our opinion of it. So that's what we see -- those are the 2 main competitors we're taking market shares from.

[Daniel Thorsson, Research Analyst]

Okay, that's fine. And then the Swedish situation, did you say reducing 140 people in Sweden?

[Patrik Andersson, CEO, President & Director]

Yes, I did. I'll give you the right -- the exact number, but that's the...

[Daniel Thorsson, Research Analyst]

Yes. And that is around 20% of the total employees in Sweden. Is that the range you expect volumes to decline roughly in the coming 2 years? Or can this be margin enhancing if volumes hold up better?

[Patrik Andersson, CEO, President & Director]

That's a good question. I think that short term, we just -- there are 2 aspects, okay. One aspect is that we are reducing to meet just the difference now in volume versus when we have the note and coin exchange program. The other element of that is that we see through our European colleagues in the center of excellence and also benchmarking the Swedish business that we can improve even further. So I think that we should see -- we should keep our margins in Sweden, or even, as you say, increase the margins in Sweden.

[Daniel Thorsson, Research Analyst]

Okay. That's a good answer. Regarding the current situation, Brink's, they commented that they target a 12% margin in France already in 2019. Is that even possible, given what you have thought about their pricing last summer? Did you meet something in the procurement process?

[Patrik Andersson, CEO, President & Director]

I should be very careful to comment on their plans and activities. I just can say that France is a tough market when it comes to competition. But also in terms of to restructure the business with strong unions, et cetera, we -- I think that we have been quite successful in the last couple of years to be able to handle that. But I don't want to comment on the Brink's plans and activities, no.

[Daniel Thorsson, Research Analyst]

Okay. And then a final one regarding SafePoints, the 880 net installments in the quarter. How was that during the quarter? How was March and end of March?

[Patrik Andersson, CEO, President & Director]

I think that it was quite even over the months, I would say, in the quarter. Just looking through my memory here, but that's what I see at least. It was quite even over the quarter.

[Operator]

[Operator Instructions] The next question is from the line of Carina Elmgren.

[Carina Elmgren, Research Analyst]

Yes. Just a clarification. You write in the report that the margin in Europe would have been flat year-on-year, excluding the calendar effect, acquisitions and extraordinary items. So are you referring to the restructuring in France and Sweden when you say extraordinary items?

[Patrik Andersson, CEO, President & Director]

Yes, correct.

[Carina Elmgren, Research Analyst]

Okay. And then a couple of more questions. What was the oil price increase impact on the organic growth in the U.S.? And also, how do you see that the margins are going to be for recyclers when you start to provide them?

[Anders Haker, Chief Financial Officer]

The fuel price impact on the organic growth was less than 1%, but it was positive. And when it comes to the recyclers, we believe in that concept strongly; and that long term, we should be up to the same margins as we have on the SafePoints. But this is -- in the U.S., this is a new product for us, so I think it will take some time to get full efficiency, and I will work with them -- with the machines and build it to our -- and how we can build it into our current structure. But long term, it's no different from the SafePoint.

[Operator]

The next question is from [ Henrik Möbitz ].

[Unknown Analyst]

Just a clarification on the restructuring. You mentioned 140 people being laid off in Sweden. Was that in Q2 alone, or is that what is planned for the overall or throughout the program?

[Patrik Andersson, CEO, President & Director]

It was for the total program, so that will be ended in -- during Q2. So that's the total program for the restructuring in Sweden.

[Unknown Analyst]

Okay. And just coming back to this restructuring program at all, if -- when you take the decision to go ahead with it, aren't you supposed to provision for all of that and take the margin impact immediately in that quarter? So if you now have decided to or you know that you've done 75% to 80% of the restructuring and some of that will happen, it will happen in real life in the third quarter, but you know -- or in the second quarter, but you know that it will happen, didn't that impact the margin already in this quarter, [ Anders ]?

[Anders Haker, Chief Financial Officer]

No, I mean the accounting rules here is that you can only provide for it when you have a definitive and signed agreement with the workforce. So as we're doing this on a gradual basis, it's not happening on a specific date, it's a program that goes on for quite some time, so you basically make agreements with each individual. And when you sign that agreement, that's basically when you provide for the cost.

[Unknown Analyst]

Understood. A couple of more questions from my side, please. As you stated, you're winning market shares from competitors in the U.S. and that is despite these price hikes. I mean, to me, it sounds like an indication that you're still very competitively priced. Would you say that this market share gains combined with price hikes gives you further confidence to continue to raise prices further going forward?

[Anders Haker, Chief Financial Officer]

I mean there are 2 components of the part, one is of course to forward wage inflation to our customers; that's one part; and then of course we like to take a bit more, if we can, but that's based on quality. I think that the key factor is the type of quality or the high quality we provide, that makes it possible to increase prices a bit beyond wage inflation. And I think that our quality is really, really good. So I think that we can continue to increase prices beyond the wage inflation, yes.

[Unknown Analyst]

Okay. And then if you look at -- your gearing now is approaching levels that are very low from an historical perspective. And during the year, at least on my estimates, you'll be coming down to pretty much all-time lows. So 2 questions on the back of that. Firstly, how is the pipeline on M&A developing? What are your expectations for the coming quarters and years? And secondly, you've been keeping a fairly consistent payout ratio around 50% of EPS, but you have -- you are allowed to go up to 60% according to your financial targets. How should we view dividend or the potential share buybacks going forward?

[Anders Haker, Chief Financial Officer]

Just to start with the last part, we are not planning to have any share buybacks, we're not planning to have any extra dividend. And then if we move up to 60%, that remains to be seen, I don't have any view on that right now. But the main point is that we want to use that war chest if you want to buy companies, and we're working very much with that and we have made some acquisitions. We actually made acquisitions for SEK 600 million since we announced the strategy on the Capital Markets Day. And we are continuing to work with a number of cases, and the pipeline has actually been increasing when it comes to interesting targets. So I'm confident that we will reach that target for M&A, which we have set to SEK 3.5 billion by 2021. So that money is going to used -- be used for that, nothing else really.

[Operator]

In the line, Mikael Holm wishes to ask questions again.

[Mikael Holm, Analyst]

No. Henrik asked my final question. So that's fine.

[Operator]

Okay. There are no further questions at this time, sir. Please continue.

[Patrik Andersson, CEO, President & Director]

Okay. Thank you very much for listening in and wish you all a great day and a nice weekend. Thank you very much.

[Operator]

Thank you. That concludes our conference for today. You may all disconnect. Thank you all for participating.