Loomis AB

STO:LOOMIS

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to Loomis Q1 '22 Report Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today on Thursday, May 5, 2022.

I would now like to turn the conference over to your speaker today, Patrik Andersson, CEO of Loomis. Please go ahead.

[Patrik Andersson, executive]

Thank you very much. Good morning, everyone, and welcome to the first quarter presentation for Loomis. As mentioned, I'm Patrik Andersson, CEO of Loomis. And with me here today, I have Kristian Ackeby, CFO; and Anders Haker, who is the Chief Investor Relations Officer. I will give a short overview of the quarter and then open-up for questions.

So let's start the presentation and turn to the next page, and that is the disclaimer page. So let's quickly turn over to the next page. Usually, I do a couple of comments when it comes to the cash market. So I'm not going to go through all the points on this slide, but just a couple of comments from my side. Of course, we still see that cash in circulation continues to grow, both in Europe, LatAm, in the US, as we have seen over the last quarters and years. The tragic war in Ukraine has increased the demand for cash in many countries and we see that, for instance, the withdrawals from ATMs are increasing in several countries. And just to mention, Sweden, as we are sitting in Sweden, withdrawals from ATM has increased by 30% in this country, and that goes for many countries across Europe.

We also see an increasingly intense political discussion about the role of cash in society and many politicians and lawmakers realized that it's important to protect cash in different aspects. And cash is important for many people around the globe, just not the vulnerable people, but everybody in the world. But most importantly, new opportunities open-up both in Europe and in the US. One very tangible example is SafePoint in the US, which grew by 21% in the quarter, but there are many more opportunities like this in all business lines. And so we see over the last couple of years that cash has proven to be very resilient to the changes in the payment landscape. And being part of the cash industry, we are now stepping up a lot of activities to protect cash and give cash a voice in the payment landscape.

So then we turn to the next page, which are the highlights of the quarter, but let me just start by emphasizing that when it comes to the revenue, this is the best quarter ever from, as I said, a revenue point of view, even though we had some impact from the pandemic in the quarter. So during the quarter, revenue picked up very strongly by the end. So we see a gradual increase as restrictions were sort of loosened up. So that's number one. Number two; some of you might have seen, we released a press release this morning and we're going to continue to repurchase Loomis share up to SEK 200 million until June 2022. And you should see that as a sign that we very much believe in the business and also the future prospects of Loomis.

Now, if I then go back to the slide and let's start from the beginning. We, first of all, have no business in Ukraine and Russia and therefore, there is no direct impact on Loomis when it comes to business. However, we have supported the Ukrainian people with different supplies, but also given a donation to the Red Cross in Ukraine. We have also now decided on a date when I step down and my successor Mr. Larrea is taking over, and that would be on May 23 of this year, so in a couple of weeks. And Aritz has made a really good job as a CEO of Loomis US, which has developed very strongly during the last couple of years.

We have also set new targets in March, we had a Capital Markets Day. And I'm not going to go through the targets, but also these targets reflect a very strong belief in the business of Loomis. We also have made the -- sorry -- when it comes to acquisition in Switzerland, this is the main driver for the acquired growth and is progressing very, very well. And as I have said many times, Switzerland will be one of the most important countries when it comes to business for Loomis in the coming years.

Organic growth was at 15% in the quarter. We see that travel and tourism have not fully recovered, but we expect that to pick up, and that will of course, positive affect volumes in all markets. And as some of you have been going to airports, you can see that for yourself that more people are traveling and then also using cash, of course or our FX services. When it comes to the operating margin, that was on 10% and we see, of course that the increased volumes combined with all the efficiency measures we have done during the last couple of years is now paying off when it comes to the margin. Operating cash flow was at 34%, but then you should keep in mind that Q1 '21 was positively impacted by lower activities when it comes to capital expenditure. So that's no major thing for us.

Let's then turn to the next page. And then here you see the slide showing a good illustration of how the margin has developed over-time. We had a low point in Q2 2020, but we had a strong recovery after that. So as I mentioned, excluding Loomis Pay, the margin was at 10% in Q1 2022.

Let's turn to the next page. So when it comes to the segment, let's start with Europe and LatAm. Overall, a strong quarter when it comes to both revenue and margin, I would say. When looking at the topline, real growth was at 21% and as I mentioned, the acquisition in Switzerland is progressing very well. Organic growth was at 15%. So positive growth, which started at the end or mid-'21, continued quarter-by-quarter into the first quarter and expanded month-by-month, as I mentioned. And we see that -- a very strong recovery in the main markets in Europe, like France, Spain, et cetera.

Organic revenue reached 91% of Q1 '19 levels, which then is an improvement with 1 percentage point. And as I said, the highest growth rates was reported in March. March was very, strong. And so we see that there is sequential improvement of the volumes during the months. Operating margin at 8.7%. So all the hard work we've done when it comes to cost and optimizing the infrastructure is now paying off, as volumes are coming back. So we also see that the synergies from the acquisition in Switzerland also gives good positive results.

Let's turn to the next page, and over to the US. Overall, a very strong momentum in the US business. Organic growth was at 15% in the quarter and we are now at 121% of the Q1 '19 levels and we see that if you compare to Q4 '21 that the level was at 114%. So a strong momentum, as I said. All business lines are improving and expanding and the positive trend is expected to continue. SafePoint, which is really important for us, of course, grew by 21% and now accounts for 19% of the revenue in the US. When it comes to the operating margin, that was at 13% in the quarter.

So we have, as I said a couple of times, some structural shortages of labor in the US market, which then temporarily reduces the margin. That has to do with increased over-time, increased salaries and investment in people and personnel in the US business. And you should see that as a sign that we are now getting ready for more growth in the US and investment into the business and people to be able to capture that growth and both grow organically and take market share. When it comes to price increases, I got a couple of questions on price increases yesterday. We are fully under control with price increases and compensate for all the cost increases we are receiving. And that is already done in the US market.

Let's turn to the next page and talk a bit about Loomis Pay. We are moving ahead with Loomis Pay. We are now launched in Denmark, Sweden, Norway. We are building up the sales organization in these countries. You see that volume is increasing day by day, week by week through our platform. The preparations for roll-out of Loomis Pay in one more major or in a major market in Europe is underway and the ambition is to launch in quite a sizable market then in Q3 '22. And we are then investing quite a lot of money, time and effort into the platform of Loomis Pay. And I've seen it myself many times and it's really state of the art when it comes to both software and hardware, and the customer reaction we get back is very positive. So next step for Loomis Pay is then to be launched in a new -- in one country in Europe coming up.

Let's turn to the next page, which is the P&L, which we have as a reference and there are no points I'd like to add. I have been through it in my presentation.

So let's then turn to the next page, which is Q&A. So I'm through with my presentation. Operator, now open up for questions, please.

[Operator]

[Operator Instructions] And your first question comes from the line of Daniel Thorsson from ABG.

[Daniel Thorsson, analyst]

Yes. Thank you very much. And first of all, thank you very much for the 6 years, Patrik. It has been very successful in all means, in my view, at least, both before the pandemic, in the pandemic, and also now after we see that in this report. So my first question is, how should we think about the US margin throughout the quarter here. It sounds like growth started off slower in January, so the margin would reasonably be lower there and ended the quarter in March with a higher level. Is that expected to continue into Q2 here and for how long time do you foresee the slightly lower margin?

[Patrik Andersson, executive]

Thank you, all. First of all, thank you very much for the kind words. No, as you said, just to say how, we see the US money developing. We need Q2 to continue to invest in people, salaries, over-time, and especially train all the people that we have now taken on board and that is taking some time to get that efficiency into the business. So I expect that Q2 would still be an investment quarter for the business in the US and then after that we would see margins picking up again. That's how I see it.

[Daniel Thorsson, analyst]

Excellent. That's helpful. Second question related to Q2 here and travel data and indications you see for tourists, et cetera. We are a month into the second quarter, we have Easter behind us in April. What are your -- like what have you seen throughout April? Have you seen much higher travel tourist FX-related business in April versus last year of April, or any data that we can rely on here to see that the recovery is continuing?

[Patrik Andersson, executive]

Yes, of course. We follow that. But it's very difficult to make a comparison with last year, it's a bit unfair because there was basically no activity last year in Easter, but we see very much that we follow the number of flights and things like that and we talk to our markets and our people in the different markets. And there is a high activity in April when it comes to traveling, when it comes to spending. There's number of hotel nights booked. All of that is pointing in a positive direction for us, definitely.

[Daniel Thorsson, analyst]

Okay. You see that across Europe and the US, I guess?

[Patrik Andersson, executive]

Yes, all across the world. Yes. I mean the activity in US has always been high, but of course, the delta, the difference is in Europe that we see that the economic activity is really picking up.

[Daniel Thorsson, analyst]

Excellent. And then final question for Kristian. Cash flow was a bit weak in the quarter. You mentioned it was seasonality and also lower CapEx levels last year. Anything we should keep in mind here on the cash flow in this quarter and also ahead in 2022?

[Kristian Ackeby, executive]

For the cash flow in the quarter, seasonality is one factor. I mean, Q1 is usually weak and last year since we cut the CapEx, we had higher sort of percentage than we maybe normally have. To look into sort of one-time impact, because there, I mean, accounts receivables are increasing, but DSO continued to be stable. So that is positive. I mean you're looking to a negative one-time effect. We have timing in cash stock in this quarter impacting us approximately SEK 100 million negatively. So that is one factor that should come back positively later on. But then on the other hand, we also have approximately SEK 100 million in subsidies where we have delayed payments to governments of more or less the same amount and that is due for payment later this year. So you can say that these one-time effects will be a washout later during the year.

[Operator]

[Operator Instructions] Your next question comes from the line of KJ Bonnevier from DNB Markets.

[Karl-Johan Bonnevier, analyst]

Patrik and Kristian, you very helpfully started to split up the business, as you indicated in the business areas on ATM, SafePoint and cash -- your international operation and all these parts. Could you just give us an idea about how the new business kind of breakdown corresponds to the old one? How did you report the ATM business before? So it might be possible to create some sort of longer time series for us.

[Kristian Ackeby, executive]

Yes. To draw the sort of bigger lines here to start with, when I was getting into details, you can say -- to simplify, you can say that SafePoint is, to a large extent, 50-50 CMS/CIT, if we then simplify not including technology and so on. And if you look into ATM, you have a larger portion CIT currently in that structure. So I hope that can help you to sort of nail-out to get back to the approximately 60% CIT and close to 30% CMS and 10% other. I hope that can help you to get the numbers right.

[Karl-Johan Bonnevier, analyst]

Excellent. And it's good to see that it also seems like SafePoint in Europe is moving quite nicely. Is that an effect of the Swiss acquisition and the impact of that or is there anything else happening underlying?

[Kristian Ackeby, executive]

Yes, it's both, actually. I mean, SafePoint in Europe is growing, but from a much lower base than we have in US. But it's correct, like you said, this is also Swiss acquisition coming into these numbers, helping the numbers to grow faster than the average sort of -- that's improving their portion. But if you look into SafePoint also in Europe from an organic perspective, it's growing and growing well.

[Karl-Johan Bonnevier, analyst]

And when you look at the business model and how much you can charge for a SafePoint in Europe compared to the US, is at about the same kind of monthly revenue you can get out of an installation?

[Patrik Andersson, executive]

Yes. You should have the same maths when it comes to Europe and US. Yes.

[Karl-Johan Bonnevier, analyst]

Excellent. And coming back to the US on the salary and over-time that affected you in the quarter. Do I understand it right that you now feel that you have basically the staffing that you need, but this is more of a question of optimizing and getting them into the operation, so there is not lack of employees, if you put it like that, to the same degree at this stage?

[Patrik Andersson, executive]

No, I think that, of course, there might be couple of more people we need to recruit, but I think that when I spoke to the CEO in the US, he told me that we have added in the last couple of months, 800 people to the business. So it's a huge recruitment process and I think that more or less, I mean, I guess, some more people we need, but the bulk has come into the business. And now it's about training, it's about optimizing the routes, it's about getting the efficiency out of it. And also we see that we need to get, what we call, one-man vehicles, one-man trucks into the business to be able to get the efficiency as well. So there are number of activities that we are doing in the US to get the efficiency up. But I think it's very, very important that to say that these activities we do now is really to be able to continue to grow, continue to take market share and especially also give the quality that the customers are asking for also in the market. So it's really an investment into the future, of course.

[Karl-Johan Bonnevier, analyst]

And going through your annual report, I noticed going through your cost structure that the personnel cost as part of the cost structure quite dramatically dropped during 2021 compared to the historic level and obviously there was some other cost that probably balanced it. Is there anything in the mix happening here or the way you are staffing your operation that is affecting those numbers?

[Kristian Ackeby, executive]

I'm sorry, I don't have that number in front of me now. So -- maybe we can take that separately because I don't have that. We don't have any significant change in our structure that impacted. So it can be from country to country and how the subsidies have played in and so on, because, I mean, both 2020 and 2021 have been impacted by subsidies in different ways as well. So there it might not be fully representative to look into the numbers for 2020 and 2021 when you look into the structures. But maybe we can have a look separately because I was not really prepared for that one.

[Karl-Johan Bonnevier, analyst]

Okay. And then one final on the quarter. Obviously, Europe, it seems to be coming out of COVID to different degrees. Which countries do you feel have come the furthest when you look at your footprint in Europe where you can say the normalization has come the furthest compared to pre-COVID or something like that and where do you still feel there is the biggest opportunity for normalization?

[Patrik Andersson, executive]

I think that we see quite a good improvement in all countries. Of course, to get to these figures we have right now, I mean the big countries need to perform. And we see that happening in Switzerland, we see that happening in Spain, of course, and so on. The one where we are lagging a bit behind is actually UK for different reasons. There have been massive lockdowns and restrictions for a long period of time. So here we hope and expect the volumes to come back, but otherwise, we basically see a very good momentum in all our markets, I would say.

[Karl-Johan Bonnevier, analyst]

Good to hear. Good to hear. And one final. Looking at the foreign exchange distribution operation, also seems to be in good recovery. And I saw within your breakdown that you had revenues in that line of about SEK 250 million last year. Can you remember what that business was pre-COVID?

[Kristian Ackeby, executive]

Pre-COVID, we were closer to SEK 500 million, and now we also have slight mix impacting that one you can say. We have more like repatriation volumes which comes with sometimes lower margins. So we need tourists to come back so we get the margin we have when we are closer sort of to the consumer, which we are when we get. Even if we are not B2C, we have businesses that are sort of closer to the customer, which brings higher margins.

[Patrik Andersson, executive]

Or you can say that March was also a tipping point for the FX business that -- of course, we have been suffering in the FX business for 2 years. But really March was the tipping point, which is very much correlated to what I said before that increased tourism, increased travel. And we are not so dependent in that business unit or business line on business travelers. It's much more the tourism that needs to come back. So that's a good sign that things are getting at least slightly back, but more or less back to normal. Not fully yet, but more or less.

[Karl-Johan Bonnevier, analyst]

Excellent. Good luck with your new ventures, Patrik.

[Patrik Andersson, executive]

Thank you very much, KJ.

[Operator]

Your next question comes from the line of Johan Dahl from Danske Bank. Please ask your question.

[Johan Dahl, analyst]

Yes. Thanks. Good morning gentlemen. Just 2 quick questions. Firstly on Europe, you're talking about this 91% sort of recovery level pre-pandemic. If you take into account the sort of structural reductions that you've made, primarily in the UK, where would that sort of percentage be take that into account?

And secondly also, Patrik, on the US, you talked about the price hikes being successful, you being able to compensate et cetera for increased cost. I'm just wondering, inflation is running extremely high at the moment. We are seeing margin sloping sequentially in the US. I'm hearing what you're saying regarding these growth initiatives that is of course visible, what gives you the confidence to say sort of that to be successful or these price hikes that you made in Q1 will actually be neutral to you guys from a cost perspective as you have a window, I guess, here in Q1 of prices?

[Patrik Andersson, executive]

I'll start with the last question. I think we have done the biggest price increase ever in the history of the business in US and that has been very successful. Of course, we have sort of taken also the security measures in that sense to see that it should be enough. Now, you never know, of course, things can go. But what we see now and we expect that price increase should be enough to cover cost inflation in all aspects. So it's a major, major price increase we have taken in Q1.

And the first question, I didn't really understand that, but volumes, in general, are then picking up in Europe over the quarter and March was really, really strong. So it's picking up now. In the quarter, we are at 91%, but, of course in March that was even higher. In the UK, it's much more about that we have sort of reduced the cost base quite dramatically in terms of number of people, number of vehicles and number of branches. So the cost structure in the UK, it's much lower, I would say, than the previous, and that goes in general for Europe. We have taken a lot of measures in many countries in Europe to take down the cost base and that's what you see now that the volumes coming back that you have an impact, which is quite positive on the margin. So I don't know if that answers your question. But that's the situation.

[Johan Dahl, analyst]

Yes, good enough. Best of luck here, Patrik.

[Patrik Andersson, executive]

Thanks.

[Operator]

And your next question comes from the line of Johan Eliason from Kepler.

[Johan Eliason, analyst]

This is Johan at Kepler Cheuvreux. Just a question, a little bit on your statement here that you've seen a structural decline in all cash visible in the Nordic market but that doesn't really impact you. Can you sort of give us some insights on where in the Nordics is the volumes today versus where the pandemic was and where is the margins sort of versus where other markets are, basically to give us some comfort that this is not a weak region for you basically?

[Patrik Andersson, executive]

Now, that's right. Johan, I think that we have had a structural decline in the Nordic countries for quite some time, everybody knows that. But I don't think that that has super-increased during the pandemic, it's the same trend basically as we've seen in the last couple of years. So no change. In any way, I mean we have seen some positive effects now coming from the war in Ukraine. I mean this is not positive in that sense the war in Ukraine, but the impact on the discussion on how to protect cash but also the withdrawals, the activity on cash in Sweden, for instance, but also the other Nordic countries. So that has an impact. So it's not like it's sort of changed pace in Sweden or in Nordics, it is the same trend we are seeing for quite some time.

Now when it comes to the margins, I mean, we have very strong margins in the Nordics, and that is due to the fact that we have very strong market positions, of course, but also the fact that we have a good mix of quite some -- quite a lot of CMS and other high-margin services in the Nordic countries and we have a very good cost base, I would say. So the Nordics, when it comes to profitability in margin percentage terms, it is very, very good. And that is also a sign that in our business, you can have a bit of decline, but that doesn't mean that it cannot have good margins and that's what we see in Nordics.

[Johan Eliason, analyst]

Excellent. And now in the UK, you mentioned they are sort of a bit behind, the other big markets in recovery. But isn't it also so that maybe in the UK the acceleration to digital has been more significant on a structural basis, so we could have a Nordic situation now going forward in the UK, which I wonder if it's as consolidated as the Nordics are?

[Patrik Andersson, executive]

I think that in Europe all markets will consolidate, as we have seen in Switzerland, in Nordics and so on, that goes without saying. I mean, you cannot have a market in Europe with many competitors, that doesn't work over-time. So markets will consolidate. It's too early to say about the UK. There are reports pointing it towards what you say, but we also have other reports saying that the government and other parts trying to protect cash or doing a lot to protect cash. So it's a bit too early to say. I mean, the country that's been sort of least open after the pandemic is UK. So we need a couple of more months to see where it's all going.

[Johan Eliason, analyst]

And then finally, on outsourcing pipeline, I would have been guessing that we should see some acceleration by now. How is it looking? Are there more opportunities down the road today than, let's say, a year ago or so?

[Patrik Andersson, executive]

No, I think that that is what I was trying to say also in the beginning that we see -- if you take US, for instance, I mean more and more retailers now looking for efficiency, looking for SafePoint solutions, for instance or other technology-based solutions like that. And that is one sign that the pandemic has sort of speeded up -- been speeding up these activities. And we also see the same thing when it comes to CMS outsourcing that -- I think that is going to pick up again now, and that's why we're investing so much in the US business now to be able to capture that growth. That will come, has come, and will come. And I think we're seeing the same trend in Europe, even though Europe was more affected by the pandemic that more and more retailers, banks, ATM companies are looking at outsourcing, looking at efficiency, and we can be there to provide that efficiency.

[Operator]

[Operator Instructions] Your next question comes from the line of Riccardo Romiati from One Investments.

[Riccardo Romiati;One Investments Sagl;Financial Analyst, analyst]

Two questions, please. The first one, if we think of the US margin excluding the business expansion cost, are these margins expected to be close to flat year-over-year in Q2 with the price increase fully implemented? And I will ask the other one separately, please.

[Patrik Andersson, executive]

Yes, maybe Kristian can.

[Kristian Ackeby, executive]

Yes. I think when you look into the US margins, I think now if you compare it year-on-year, it's mainly related to sort of staffing -- combination of recruitment costs, over-time and so on. So that will over-time decrease and that means that the margins will increase again. And that will not happen. So if you compare quarter-to-quarter, you might not see the impact, but when you see the year sequentially, we expect the second half of the year to improve compared with the first half.

[Riccardo Romiati;One Investments Sagl;Financial Analyst, analyst]

Okay. And maybe with your last point, can you please help us understand how quickly this new business flow will support sales? And you partly answered that is mostly coming -- it maybe is already coming about in Q2, but mostly in the second half of the year.

[Patrik Andersson, executive]

Yes. I would say that we need to get staffed, that we need to get staffed -- I mean, there is a great momentum in the US business as we speak already, but I can say that if we had been fully staffed that would be even higher. So we need to get staffed, we need to train our people, we need to get the trucks needed, and then we're ready for -- to really, really capture the potential which is in the US market. But we need some more time on that. But as I said, we have -- there is a good momentum, really, really good momentum in the US.

[Operator]

I think we have no further questions. Please continue.

[Patrik Andersson, executive]

All right. That's it. That's all. Thank you very much for listening in and all good questions. Take care, bye-bye.

[Operator]

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