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Loomis AB
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Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Q1 '23 report of Loomis AB. [Operator Instructions] I would now like to hand the conference over to Aritz Uribiarte, President and CEO. Please go ahead.
Thank you very much. Good morning everyone, and welcome to the first quarter presentation for Loomis. My name is Aritz Uribiarte, and I'm the CEO of Loomis and with him here today I have Kristian Ackeby, our CFO; and Jenny Bostrom, our Head of Investor Relations.I will give a short overview of the quarter and then open up for questions. Let's start by the presentation by turning to Slide 3.We had a solid start to the year. The business in Europe and LatAm was supported by continued organic growth. And in the United States, we saw growth across all business lines. And we believe our high quality services will continue to gain market share. Although there are signs that inflation, energy prices and supply chains are stabilizing, it is apparent that the macroeconomic uncertainties are having an effect on society around us. Despite the uncertainties, we have seen volumes increasing. We are monitoring how the changing environment may impact both our business and our customers, and we'll adapt the operations as needed.I would also like to highlight that equal access to cash and payments is an increasingly important issue globally. And we see more discussions around the world on the importance of access to cash. We have a fundamental role in supporting central banks to ensure that cash is available and payment flows are functioning. Cash continues to be a common means of payment and important from an inclusivity perspective. And I'm proud of the part that we play in society. Let's move on to the next page where we have the highlights for the quarter.When it comes to revenue, we reach SEK 6.8 billion, which is the highest revenue ever. And we achieved record revenues for all 3 segments. The revenue has been mainly supported by volume growth, but price increases to customers as well as favorable currency movements have also contributed. Organic growth keeps being strong with close to 12% in the quarter, and the performance was strong for both the U.S. as well as Europe and LatAm. When it comes to the operating margin, that was at 10.5%. The margin was positively impacted by increased volumes and implemented price increases, but negatively by a higher cost base. Finally, our cash conversion was at 100% for the quarter. Despite the increase in accounts receivable due to our strong growth, we have been able to keep our day sales outstanding stable.Let's turn to the next page. Here you can see how the revenue and the margin have developed over time. We have had a steady increase in our revenue since the beginning of 2021. Including the currency impact, revenues increased 20% in the quarter compared to prior year. For the quarter we achieved an operating margin of 10.5%, which is 1.4 percentage points higher than prior year.Let's have a look at our segments. We turn to the next page and start with Europe and LatAm. The positive trend in Europe and Latin America continued where we had another strong quarter. We achieved double digit organic growth and reached record high revenues of SEK 3.3 billion. The operating margin is at 9.5%, supported mainly by the higher volumes. Also important to consider is that the full impact of the implemented price increases and negotiations have not been realized in the quarter. There are some markets that have been extra challenging for us and therefore we have initiated a restructuring plan mainly related to Germany. Total cost for this program is estimated to SEK 50 million to SEK 60 million and will be recorded as items affecting comparability. During the first quarter, we have recorded SEK 12 million of the total estimated cost.Turning onto the next page and focusing on the trend of both revenue and margin, we see that the actual growth was at 16% when looking at the top line trend. From the beginning of 2021, we have seen a positive recovery, expanding quarter by quarter in our main markets. The operating margin increased 0.8 percentage points compared to Q1 last year. And looking at the last 12 months, the margin is 10.9%.As I have already mentioned, the margin was affected by a higher cost base where the impact of the annual price increases have not been fully realized in this quarter. The majority of the price negotiations have now been finalized, which we should see have effect in the next quarter.Let's turn to the next page, over to the U.S. The strong momentum continues in our U.S. business. Revenue was at SEK 3.6 billion, which continue to increase in recurrent revenue. Our revenue related to automated solutions and ATM representing 43% of our U.S. revenue. Organic growth was at 12.5% in the quarter with our automated solutions business with SafePoint achieving double-digit growth for the ninth quarter in a row.Although we continue to see improvements in the labor market, we're still facing a high turnover in the U.S., which requires an extraordinary effort to continue recruiting and training new employees, all to continue providing high quality service. Maintaining our service level is key to keep gaining market share. We achieved a strong operating margin of 13.9% despite the impact of recruitment and training related costs. And the operating income reached 500 million.Moving on to the next page and focusing on the trend of both revenue and margin. We see the exceptional U.S. business revenue trend during the last 2 years. We are benefiting from a positive FX impact, but we reached all-time high revenue figures in local currency once again. And Q1 2023 is 30% higher than Q1 2020 from an organic point of view. Regarding the operating margin, we improved the prior year's numbers by 0.9 percentage points. We have successfully hired more employees to support our growth. And the related costs for recruitment and training temporarily impacted the margin for the quarter. We will keep focusing on recruiting and retention as well as on efficiency to keep improving our margins. In most recent statistics public available, the indication is that labor market should ease up somewhat, but remains to be seen.Let's turn to the next page and talk about Loomis Pay. Also for Loomis Pay we had a strong revenue growth in all markets. Notably, we also increased revenue compared to the fourth quarter despite the seasonality effects. We keep seeing transaction volumes keep increasing as we move ahead. From the quarter, the increase was 90%. Over time, there is a strong correlation between increase in transaction volumes and revenues. However, from quarter to quarter, this can vary.The Loomis Pay solution, which was launched in Spain at the end of last year, is progressing as planned. And we are continuing to tailor the offer to the customer demands. In the coming quarters, our main focus will be on growing the business in Spain, but also growing in the Nordics.Turning to the next slide, we see our continued initiatives for a sustainable business. We strive to reduce the carbon emissions from our business. And with the order of 150 new armored electric vehicles for the U.S. market that we announced in February, we have taken a significant step. Here in the image you can see one of these electric vehicles on the streets of New York. I would also like to highlight that we have made a commitment to the New York City Department of Environmental Protection to be completely emissions-free in New York City by the end of 2025.As a result of this pledge, they have also granted us a variance against idling penalties, which is important since we are unable to turn off vehicles while on route for security concerns. I'm proud that we are leading the transformation in the industry. And it is a strength that we are finding the initiatives to reduce our carbon footprint that are interlinked with the business needs.Loomis has a zero tolerance for bribery and corruption. Our anonymous whistleblower hotline Loomis Integrity line has since its inception in 2010 been an important tool to ensure compliance with our code of conduct. I strongly believe in promoting a culture where everyone is encouraged to speak up, and I'm therefore pleased to share that we have continued to develop the Integrity line and introduced an update in the quarter.Let's turn to the income statement slide where we have highlighted the items affecting comparability, which are related to the restructuring plan I committed on earlier. The increase in net financial items is largely a result of the increased interest rates. The majority of our financing is in variable rates. The monetary loss from hyperinflation was at about the same level in this quarter as the same period in prior year. It's important to highlight here as well that we have achieved the highest earnings per share for our first quarter and the second highest earnings per share ever.Moving on to the next slide, I just wanted to highlight our performance in relation to our history. As you can see also on a rolling 12 month basis, we have achieved record revenues and with a continued improvement to our margins, and now at 11.1% to be viewed in relation to our target for the strategic period of 12% to 14% we are on the right track.Let's now move to Slide 14 to summarize the first quarter. We achieved record revenues with double-digit organic growth for both Europe, LatAm and in the U.S. Secondly, we increased the margins for both Europe, LatAm and the U.S. compared to Q1 2022. Thirdly, transaction volumes keep increasing in Loomis Pay. While we are still in early phases after the launch in Spain at the end of last year where we have high expectations due to the merchants' feedback and our unique offer.With that, I'm through with my presentation, so let's turn to Q&A. Operator, we're now open to questions, please.
[Operator Instructions] Your first question is from Viktor Lindeberg with Carnegie.
I have a couple of questions both on the numbers as well as maybe from diving into your annual report. Starting on the restructuring in Europe and in Germany, when looking at this program, what is it in Germany that you aim to address? Is it predominantly employees? You want to shut down, reshuffle branches, or just to understand what's happening in Germany? Secondly, you mentioned that it's not only Germany, so what other markets and initiatives are you aiming to do in this SEK 50 million cost frame here? Starting on that, maybe continuing up with a few more after that.
Good morning, Victor. And thank you for your question. So I think the first important thing to say is that we are constantly driving to make our operations more efficient. As we said, the majority of the restructuring plan is for Germany. Unfortunately we cannot speak much about that. We are in actual negotiations with the unions there. So I cannot comment much about that. Regarding other countries, it's the normal work we constantly do to drive and try to be more efficient. That's all. Nothing major there.
Okay. I think as from the past couple of weeks the U.S. market has been sort of shaken outside the smaller regional banks being seemingly under pressure, at least judging by the stock prices. But maybe fundamentally, things can move fast in a bank. So just to get a sense of your exposure in the fixed segment in the U.S. and any discussions you may have had or anecdotes you want to share on the back of this elevated uncertainty with regards to what's going on in the U.S. now?
So all I can tell you about the U.S. is, I mean we never comment on specific customers. But in general, the turbulence that we're seeing has low or no impact in our business, both when it comes to revenue and balance sheet. And we are seeing gradually a high demand in the bank business in the U.S. So no or very low impact that we have in that side.
Okay. So maybe moving to Europe and more physical distress in the sense that France has been a market that may have been or could be affected by what's going on now, people walking the street with fliers and some strikes on the back of the pension reform being implemented. You have a big operation in France. Have you seen any impact on your operation in the numbers when we look at Q1? Or is there anything going on now in Q2 that we should be mindful of living? That is your biggest market in Europe.
No impact at all in our business in Q1. And we don't expect any impact in Q2 either.
Your next question is with Daniel Thorsson with ABG.
First one, a question on Loomis Pay. The previous target obviously not relevant today, but that was SEK 3 billion in sales in 2025, and that is taken away. But how do you see the potential in the product here in the coming years? Can you give us some more flavor on the growth trajectory and the plans growing in market and then also potentially launching in new markets?
So as of now, I mean, we do not have any specific external targets for Loomis Pay, as we explained in our Capital Markets Day. Of course we do follow Loomis Pay on specific KPIs internally. You're not the first one to ask us for this and to require this. And I think that short term, we will probably start sharing some external KPIs so that you can follow the business in a better way.
Okay. If I rephrase it a little bit, what do you think is the potential penetration you can achieve with your customers? If you take a mature market like Sweden, for example, can you penetrate the customer base up to 20%? Or is 5% on potential or 80% over time? Or how do you really think about that regarding the product features and competition?
Daniel, we're sorry, we don't disclose those numbers now.
Fair enough. I also had a question on Germany. I heard your responses on Victor's question. But why has Germany been loss-making? I mean it is a cash-intense market. Is it only because you are too small or any other reasons?
So I think, first of all, we're small regional and I would say local there. Secondly, I mean, perhaps we were expecting more outsourcing from the financial institutions that didn't arrive. And then as we do always, I mean we try to restructure and to adapt to the revenue levels that we have as we've done in other countries like the U.K., for example, in the past.
Yes. Okay. I see. My final question is maybe for the Board. But this was the first quarter for a couple of years or at least several quarters that we don't get buybacks going into the next quarter. Is it any reason for that, that we should be aware of? Or is it potentially some M&A you're looking at instead? Or can you give some flavor?
Look, the only thing I can tell you here is that we continue to focus on shareholder distribution and capital allocation. If there's going to be buybacks in the future or not, I cannot tell you specifically now. But today, we've got the space to do both M&A and buybacks together with the dividend. Not much more I can tell you. I mean, that's a board decision, obviously.
Your next question comes from KJ Bonnevier from DNB Markets.
I noticed your comment in the report about taking market share in the U.S. Is that a consequence that you now see that you are at a better balance between, say, the business opportunity you have and the employment level you have in your organization?
Not just that. I think the higher service quality that we offer is also appreciated by our customers. But it is true that, I mean, during the first quarter, we managed to hire net 300 people as well, and that will help us to keep growing in the U.S. market.
Because I remember earlier you said, you indicated that you were, say, basically thinking saying no to new contracts, that you struggled to find the employees to handle extra volumes. Is that a better balance now?
That's better balance, yes, no doubt. No doubt. And you can see that with the double-digit organic growth that we're having.
Exactly. I noticed you have a strong, obviously, continued development on the SafePoint side, but which other parts of the business do you see that you're capturing market share in?
I think, I mean, mainly -- I wouldn't just have just name SafePoint as such, it's all the automated solutions. We have recycle business there, we have front office machines as well, that on one side. And then I see that there's also a huge possibility on the ATM side as well.
I also saw that you found a small acquisition in the international logistics operation in the U.S. How do you see that fitting in?
No, that has integrated really well. I mean it was a small opportunity. It complements perfectly, okay, with the international business service offering that we have. And so far so good. Yes.
And AIB was that specialty?
It's low-value package services.
And is this your first venture into that? Or is that something you already are doing or in the, say, in the legacy business?
No, we've already been doing that in the legacy business, yes. It's nothing new.
I didn't see it in the notes from the AGM yesterday. Was the bought back shares canceled or are they kept in inventory?
No, there are still kept, they haven't been canceled.
They haven't been cancelled, okay. But the 10% mandate was renewed, I guess so.
Correct. Yes.
[Operator Instructions] We have a follow-up from Viktor Lindeberg.
I'm looking at Europe and the country mix. You have probably quite good support from the growth in Argentina, Chile and Turkey, when looking at the segment of Europe as they probably outpaced the group, call it, structurally. But that I think also maybe begs the question as these are CIT markets to a larger extent. And you're also not very sizable in terms of market position in Chile, for instance. Is this dilutive to the margin in Europe structurally when you grow faster in these countries?
No, I think it's stable. I mean you need to consider that Argentina and Chile could mean 3% of our total revenue, and that would have been stable.
Okay. So they are not growing faster than the group.
Yes, they are growing faster than the group, but the impact being 3% of the total revenue is not that much.
Okay. But do you agree that they have a lower profitability. So maybe in the longer run…
No, no, no, no. It's the same. They have the same profitability as rest of the countries. They're an average there.
Okay. Second, on the organic development in Europe. It was maybe the last quarter where you have comparabilities from COVID restrictions, so call it, in that sense, a bit easy comps in Q1. But yes, you had negative organic growth in the U.K. and also in Switzerland, so minus 4%, minus 8% on my estimations here. Can you elaborate on why these markets are falling that much behind?
I mean it's different cases. And important to understand here is when you are having those price negotiations with customers, sometimes you could lose certain volumes, especially in customers where you're not making as much profit as you expected. That would be one thing. And if we focus a little bit in Switzerland, I mean, there has been an effect in -- within the international business in the banknote volumes business that we were managing. It's very volatile, and it has gone down a little bit. But nothing glaring. And we expect that to come back again.
And also, Viktor, the assumptions you had there on the negative organic growth, it sounded a little bit high on the high-end side. I think you need to capture the currency movements as well.
Yes, that's adjusted for currency movements, but maybe we have different currencies in our models there. But okay, good point there, Kristian. Maybe coming into Loomis Pay then, I was looking at your annual report, and it seems that your gross losses, they expanded in 2022 despite you growing sales. Just to understand the dynamics in the cost of goods sold in that business and also the OpEx. Are there meaningful onetime investments in the COGS? And what do you anticipate? What sales level would you need to be at breakeven on gross profit level? Is that anything you can share with us?
I mean short term, we're not looking at being breakeven. Again, it's a new business for us, it's a perfect complement for our actual business. And what we're focused now is in trying to grow the business. And as I said before, I mean, we've got a very good acceptance, not just in the Nordics but also in Spain. It's a bit early stage still in Spain. We are adapting. And that is something that we will have to do. It's not that we have a final product. Every time we launch in a different country, we need to adapt to that different country, and that has certain costs as well. But I don't know, that's all I can tell you about Loomis Pay.
Yes, I mean that obviously makes sense on the bottom line. But for you to have a business case to start with, you need to find a path to at least having gross profit breakeven, right? So how are you confident in that you actually will at any point, the earnings, what trajectory? We're not talking point in time more indicative levels required, if you need to tailor-make the product for each market, how sort of will you become profitable on group at any point in time?
I'm very, very comfortable with this. I mean, you need to understand that this is just a start-up. And we started in the Nordics, mainly Denmark and Sweden, and we need to scale up. And that's the opportunity we have with all those different countries where we already have presence in and where cash is still a key component when it comes to payments in those countries. I'm very confident on this. We cannot disclose any numbers on what we're expecting to be in breakeven points and all that. But I can say we are very confident that I fully believe that this is a perfect complement to our service offerings today.
Okay. And maybe more then a technical question. I don't know if this is for Kristian. But on the COGS, what is in the COGS in Loomis Pay that is sort of not that scalable in the shorter term now? Is it investments? Or is it basically the sharing with the clients in the initial phase of the contracts? Or just to understand why COGS are growing that much in light of the limited top line growth?
Yes. I think this is also related to how the structure is, like Aritz mentioned here, that you come from a start-up to a scale-up. So that means that your income statement also on the gross margin side will look a little bit different. But I think you're partly referring now to the annual report, and I don't have that in front of me now. So maybe we can have a look separately, you and I.
Yes. Yes, absolutely. I appreciate that. Maybe looking then at your ATM revenue model. Can you just remind us a bit, I think at least some investors are quite interested in understanding the dynamics of this, how it works from service delivery to profit or revenue recognition in your business and just to see how that fits and just an update on that.
Sorry, I'm not sure I understood the question.
Yes. So just to remind us of ATM, how much of a volume-based revenue is there in that business? And how much of that is, let's call it, certain fixed fees in the contract or in the service delivery?
I think it differs a lot. I mean the ATM business is related to all different kinds. And we have different ways of selling the service. I think if you look into the total ATM concept, we do everything from a full service. We have our own ATMs. To the first one, we have the simplest CIT. If you look into the business as such and look into how we have had it historically, when you look into CIT and CMS, it's relatively, you could say, it's a bigger portion of CIT in ATM compared to SafePoint. But otherwise from that, it differs a lot from the different offering we do to the customers.
Okay. I was just also mindful of that, you call that a recurring revenue. But it seems if it's CIT, it could be quite variable in that sense.
But it's not that you cannot…
Yes. But Victor, you also need to consider here what's not CIT, and we're talking about monitoring those ATMs and forecasting those ATMs. That is recurring revenue.
Yes, that portion of it, correct, right, yes.
But I think it's also there, Victor, important to have in mind that even if you have a CIT contract in an ATM, you don't change it for tomorrow.
For sure. Yes. Final question from my side is actually, I think you provided a very good chart in the presentation where we're looking at the longer-term development on Slide 13. And looking at that from the U.S. perspective, there has in the past been a good correlation in margin development when you've been expanding margins going into the pandemic, the past 5, 7, 8 years, thanks to higher value-added services and CMS and SafePoint outgrowing. So call it a structural improvement in the margin there over a number of years. But just now, looking where we are on rolling 12 months and also in Q1, it seems that is now decoupling quite a lot when looking at profitability and also how you sort of outpace on the higher-margin business in terms of growth with SafePoint, not the least. So I think that sort of begs the question, are you -- how much are you investing in the business? And how much are you taking volume and maybe market share at the expense of margins because it's decoupling quite a bit here in recent history here.
So Victor, when it comes to margins, I mean, we stick to what we said at the Capital Markets Day, that we will be between, an EBITDA margin between 12% and 14%. Now you do need to consider when we are comparing to years before 2019, we didn't have Loomis Pay and the impact that Loomis Pay has in our margins today. But we still believe and we're committed to achieving that between 12% and 14% there. Then the rest, it's a bit of a mix depending on what you're talking about. I mean, in the U.S., we might be reducing a little bit our margins to capture more market share. But I think we will continue the same recovery we had in last year this year as well. Remember, last year, we started Q1 with hiring a net of 600 new employees, and we're committed to increasing those margins throughout the year, and I would expect the same this year as well.
Okay. But if then that correctly understood, that when you sacrifice a bit of margin for growth, it's a double whammy on the return on capital given that the growth is largely coming from more asset-heavy services assets of SafePoint for instance.
No, but, I mean, SafePoint it's not asset-heavy. I mean we lease those sales. So that would not be the case.
It might actually also be the other way around. If you look into our CapEx in recent period time and also now in Q1, it's lower than our historical average of 6% to 8%. That is sort of what we see now. We said it at the Capital Markets Day that when we can get leasing for SafePoint and ATM, it's relatively asset-light. So you should also see that our return is improving.
Okay. But isn't that captured by IFRS 16 that you actually include leasing in your payment or am I misunderstand you?
No, yes, you include that in that calculation. If you assume that in your DCF as cash out, that's sort of for your way of calculating the DCF then.
There are no further questions at this time. I'll now hand back to Aritz Uribiarte for closing remarks.
Thank you very much. Thank you very much for listening in. All great questions. Take care. Bye-bye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.