Loomis AB

STO:LOOMIS

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the Loomis Q1 2024 Report Conference Call. I am George, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Aritz Larrea, President and CEO. Please go ahead.

[Aritz Uribiarte, executive]

Thank you very much. Good morning, everyone, and welcome to the first quarter presentation for Loomis. My name is Aritz Larrea, and I'm the CEO of Loomis. With me here today, I have our CFO, Johan Wilsby, and Jenny Bostrom, our Head of Sustainability and Investor Relations. I will begin by giving a brief review of our Q1 business performance and an overview of our results before taking questions. Let's start the presentation by turning to Slide 3. Starting with an overview of the market development and how the trends relate to our business, we had a solid performance during the quarter. We continue to see high demand for cash handling Automated Solutions, and we have a strong growth within SafePoint in both the U.S. and Europe. This is our second quarter with CIMA in the group, and I'm pleased to see how well they have integrated. CIMA had a strong performance in the quarter with positive sales synergies. While many of our business lines had revenue growth in the quarter, we did see a cyclical volume decline in the international and the FX businesses. As we have communicated since the third quarter last year, we have seen that the higher interest rate environment and metal pricing impact the demand for storage and transportation of cash and valuables, which has a negative impact on the international business line. Similarly, the high metal prices impacted the gold trading within our FX business. We are witnessing an increase in global conversations around the significance of having access to cash due to the present geopolitical environment and growing cybersecurity risks. I would like to highlight that in the Global Payments Report for 2024, it was called out that cash remains relevant amid economic uncertainty. We will continue to support society with providing efficient and sustainable payment loans. We're also pleased to see an increase in interest from many stakeholders when it comes to our work within sustainability. I'm pleased to see that our sustainability metrics are trending in the right direction, and we are exceeding the targets set out for the strategic period ending this year. I will share some more details of our progress later in the presentation. Let's move on to the next page where we have the highlights for the quarter. We had a strong solid revenue growth in the quarter and achieved a revenue above [ SEK 7.2 billion ] with growth for all 3 segments, including the currency impact on acquisitions, revenues increased 6.5% in the quarter compared to prior year, and the organic growth was 6.3%. CIMA contributed to the group's revenues with close to 3%. Changes in currency rates had a negative impact on revenue. We recorded double-digit growth for our Automated Solutions, even when excluding CIMA. Our commitment to growing and developing our offer of Automated Solutions is an important part of our strategy. Our operating margin was 10.4% in the quarter, and the performance across the business was mixed. The U.S. segment had a great performance with volume growth and also successfully continued to implement operational efficiencies. Europe and Latin America had a more challenging start to the year and actions around the way for margin recovery. The calendar effect with less days in March due to the timing of Easter had a negative impact of close to 1% in operating margin for Europe and LatAm. Allow me to further address these drivers in more detail later when we run through the segments. The operating cash flow for the quarter was impacted by a temporary buildup of stock on foreign currency, which will be reversed in the next quarter. If we exclude the temporary buildup, the cash conversion ratio would have been 78%. Due to timing between the quarters, it is more relevant to look at this metric over a 12-month basis, and then the cash conversion was a strong 89%. We have repurchased 700,000 shares in the share repurchase program, as we announced yesterday, the Board of Directors has resolved to repurchases for an amount of up to SEK 200 million in the second quarter. The Annual General Meeting yesterday resolved on the cancellation of close to 4.3 million treasury shares that are held by Loomis. Following completion of the transaction, the total number of outstanding shares in Loomis will amount to 71 million shares. In April, we obtained a BBB investment-grade credit rating with stable outlook from Standard & Poor's Global Ratings. I'm proud that our fundamentally strong cash flow generation and financial position have been recognized with this rating. This rating provides us with additional flexibility in the financial markets going forward. Let's then turn to the next page and address our reporting segments, beginning with Europe and LatAm. The positive trend in revenue growth in Europe and LatAm continued where we did have a solid quarter. Price increases as well as growth from emerging markets were the main contributors to the organic growth. I would like to highlight that while we have been raising prices, they have not yet been fully implemented in the quarter. The annual price negotiations are ongoing, although not as expected. CIMA had a strong performance in the quarter, and I'm pleased to see that they are integrated well in the group with positive sales synergies. Also, our Automated Solutions with SafePoint and recyclers had a double-digit growth on a stand-alone basis as well. The present macro climate with high pricing on precious metals, especially gold as well as interest rates have negatively impacted our FX and international businesses. It is too early to say when the cyclical impact will trend back. However, we hope to see it reverse during the second half of the year. Our primary goal for 2024 is to improve and increase our profit margins, recovering our margin in the Europe and LatAm segment will require both efficiency gains and also restructuring strategies. Let's turn to the next page over to the U.S. The U.S. business is more than 50% of our business, and we keep delivering strong performance in this market. The cash handling business in the U.S. is a growing market, and we are well positioned as the outsourcing of cash continues. Revenue and operating income were record high in local currency, while there was a slight negative impact from changes in the U.S. dollar against the Swedish krona, revenue reached [ SEK 3.8 billion ] with a continued increase in recurring revenues. Our organic growth was above 6% and includes a significant volume growth. I want to highlight that the Automated Solutions business with SafePoint achieved double-digit growth for again another quarter in a row, and we see a strong pipeline ahead. Our revenue related to Automated Solutions and ATMs increased to 45% of our U.S. revenue, which is margin accretive. We reported a strong operating margin of 15.1%, thanks to our volume growth and our work on operational efficiency. The labor market trends have also been beneficial compared to prior year. 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 compared to the previous year, and revenues amounted to [ SEK 16 million ]. The sequential decline compared to the fourth quarter follows the normal seasonality pattern in the food and beverage market. Transaction volumes increased compared to the same quarter last year and the fourth quarter and reached SEK 1.3 billion. During the quarter, we acquired a Spanish POS provider with a broad distribution network across Spain, which will accelerate our growth journey in Spain. Let's turn to the next slide, where I will share a couple of highlights on our progress on our sustainability initiatives. We can see that our sustainability-related projects are moving forward, and we are clearly on track towards reaching our sustainability targets for the strategic period. Keeping our employees safe and minimizing the risk of injuries is one of our most important responsibilities. Therefore, I'm pleased to share that we have succeeded in further reducing the injury frequency rate during the year, and we'll continue to strengthen our proactive measures for our employees wellbeing. Even with our strong organic growth, we have successfully decreased our carbon emissions from fuel consumption and energy use in absolute terms. On a rolling 12-month basis, we have by the end of Q1 2024, reduced our emissions by close to [ 19% ] compared to our 2019 baseline. This should be put into context that we have had an organic growth of 16% during this period. Our investment in a lighter and electrified fleet, smarter route planning systems and technology will contribute to further emission reductions going forward as well. Although the implementation of the Corporate Sustainability Reporting directive may be delayed in Sweden, we are continuing with our efforts to set our ambitions and targets for the next strategic period. Let's turn to the income statement slide, where I will start by highlighting the strong growth where our real growth, excluding currency, is about 9%. We also have some costs associated with the restructuring plan in Europe and Latin America. In general, we continue to be delayed with the restructuring, and you can anticipate the remaining portion of the restructuring plan to be recorded in our income statement during the second half of the year. I would also like to highlight that the increase in net financial items is largely a result of increased interest rates. We see the entire impact of the prior interest rate rises in our finance net for the quarter since, as you are aware, the majority of our borrowing has variable rates. Moving on to the next slide to summarize our performance. We continue to see a solid organic growth for the group. It is important to remember that when we announced our growth target for the strategic period, we always stated that growth will be higher at the beginning of the period with the COVID recovery. Thanks to growing revenues and structured work on improving our operational efficiency, our margin increased in the U.S. As I touched upon earlier, there is more to do in terms of margin recovery within Europe and LatAm, and this is a high priority for the year. In terms of Loomis Pay, both transaction volumes and revenues ramped up this year, and I'm positive that our efforts and investments in Loomis Pay will continue to generate results. While we did have some timing effects in the quarterly cash flow, the cash conversion ratio on a rolling 12-month basis was strong, and we have the capacity to continue to make both strategic and value-creating acquisitions and distribute returns to our shareholders. Our capital allocation priorities remain and we aim to use our capital in the best way to generate returns and create value for our shareholders. The Board of Directors has decided to continue with share repurchases in the second quarter in addition to the dividend of SEK 12.5 per share that will be paid out later in May. The Annual General Meeting has decided to cancel about [ what 4.3 million ] treasury shares as well. Lastly, we're making progress within our climate-related sustainability initiatives. And in 2023, we further decreased our absolute emissions from transportation by close to 4% compared to the level of last year. As we get more and more electric vehicles on the road and further work on optimizing our routes, we are decreasing our emissions for transportation despite growing our business volumes. As I mentioned before, keeping our employees safe and minimizing the risk of injuries is one of our most important responsibilities. While we are seeing our efforts having the [ desired ] effect, we can never be done here, and we will continue to strengthen our proactive measures for our employees' safety. Our investments in a lighter vehicle fleet is [ the twofold ] with new innovations and higher security features, we can both further improve the safety of our coworkers while also reducing emissions -- before opening up the Q&A session, I wanted to share that we will be hosting a Capital Markets Day on November 13. We will share the details at a later point in time, but for now, save the date. With that, I'm done with my summary of the first quarter of 2024. So let's turn to Q&A. Operator, we are now open to questions, please.

[Operator]

[Operator Instructions] Our first question comes from Viktor Lindeberg with Carnegie.

[Viktor Lindeberg, analyst]

I have a couple of questions from my side. Maybe some more detailed ones starting on FX in Europe where you give us the number of the FX being a negative 5% year-over-year. And just to try to understand here, given your bulk of your business being euro-denominated and adding to that some swiss as well as sterling pound exposure. All these currencies are actually plus when looking year-over-year. So there must be a very, very meaningful impact coming from other markets such as Argentina and Turkey then, but you also give us the impact from Argentina. So I'm just trying to understand and maybe you can share some more details on the segment split here because I seem to be quite off when trying to model the FX on Europe and how the country is tied together here? Or if you have changed your definition on FX as of recently. So maybe I have missed that as well. But starting on that [indiscernible].

[Johan Wilsby, executive]

Viktor, Johan here. Sure. We have not changed any [ sensification ] so we can start with that. I mean the impact that you see is largely to do with the devaluation of the Argentinian peso that happened in December. If you take [indiscernible], the currency impact would be a lot flatter as you indicate. Besides that, you also have some depreciation in emerging markets like [ Turkey, year-on-year ] et cetera, constituting to that negative number. And in terms of your modeling, these 2 countries represent less than 2.5% of group revenues just to have -- give you an indication.

[Viktor Lindeberg, analyst]

Yes. I think that's what I have in my model as well. So maybe we can take something of that offline later. But then I understand there's no changes. And relating to that, is there a meaningful mix effect when you look at different profitability in different countries where some countries may have grown or shrunk year-over-year. So looking beyond the FX and the international businesses that you highlighted being headwinds here. Are there any meaningful mix changes where high-margin countries have derailed or vice versa?

[Aritz Uribiarte, executive]

No, no. I mean the normal [ aspects ] are the one that we always talk about we got Germany as loss making, of course. But there's no other big change there. I mean the biggest effect is the international business. That is big in Switzerland. It's important also in U.K., and it's important in Germany, and that's where it's impacting most.

[Johan Wilsby, executive]

And maybe to add what Aritz was saying in his summary that the sort of margin impact of the less working days as well if you didn't catch that.

[Viktor Lindeberg, analyst]

Yes. And I suspect that one we should just reverse for Q2 and the margin impact on calendar?

[Aritz Uribiarte, executive]

No, that's not the case. I mean we don't have more working days in Q2 compared to prior year. So with Q1, we did have...

[Viktor Lindeberg, analyst]

Did you have -- because you had an extra day in February this year as well, but I thought it was more the timing effect of Easter that was a negative for you, but you have less working days in absolute terms in Europe, you mean?

[Aritz Uribiarte, executive]

Yes.

[Viktor Lindeberg, analyst]

Okay. Got it. Looking at your European SafePoint rollout, and I try to strip out how much is organic, trying to strip out CIMA. And it looks to me that you're growing very nicely organically in SafePoint Europe. I'm looking at somewhere in the range of 25% year-over-year, accelerating from the levels you were at back in Q3, further accelerate in Q4? Or is that maybe a bit off? Or is it ballpark where you see your numbers organically for SafePoint Europe?

[Aritz Uribiarte, executive]

I think you're correct. I think now all the efforts that we've been doing for a while, and we've been receiving questions about how -- when will this look like the U.S. and we've always explained that that's impossible. Nevertheless, we have been making a lot of efforts in previous quarters, and now that's paying off. So we are seeing a big uptick in SafePoint Europe. So I think you are spot on.

[Viktor Lindeberg, analyst]

Okay. Good. That's very comforting to see. Can you give us some more details on countries or parts of Europe where you've been more successful or where you see the growth taking off now? Is it many, many customers or a few large ones just to get some more color on the success of the rollout?

[Aritz Uribiarte, executive]

It's not large customers, as it could be in the U.S. We've got many customers and in different countries. We don't have a specific country. Obviously, the bigger ones have a bigger business and a bigger increase, but it's to spread along with the European countries.

[Viktor Lindeberg, analyst]

Okay. And I guess the million-dollar question here is also now when you have a positive mix change when looking at the business, it should actually suggest margins coming up, not the least year-over-year. But you seem to be obviously hampered by the International segment and also FX being cyclically under pressure. But -- do you agree with the thesis that you should be seeing a good margin expansion underlying if you were to exclude the cyclically soft factors? Or is the margin in Automated Solutions and this adjacent business not as good as it has been in the U.S.

[Aritz Uribiarte, executive]

No, I think you are spot on, it's as good. I think the only thing that you were missing. The only thing that I would add to your summary is that the price increases where we were expecting to catch up from the delay that we have since the inflation was too high in 2022. It's not being as we expected, the price increase this year. I'm saying [ we're covering ] the costs that we're having, but we're not catching up in that sense. So that's the only part of the -- of all the activities we had to recover margins that is not covering our expectations, the price increase. The rest is what it is we're expecting, as you say, international FX business to turn around and come back in the second half of the year. And we have the restructuring plans and [ positive ] programs ongoing as well. And CIMA been margin accretive as we explained in the past. So all that is helping. But price-wise, we're still [indiscernible].

[Operator]

[Operator Instructions] Our next question comes from Karl-Johan Bonnevier with DNB.

[Karl-Johan Bonnevier, analyst]

Yes. Looking at the development, say, and maybe the lagging effects that you now see in Europe, do you still feel good about the trust to [ 14% ] margin range for this year?

[Aritz Uribiarte, executive]

We said 12% to 14% at the end of the year. As I said now to Viktor, I think the only part that we are a bit behind is that price increase is not pulling our expectations. But we're still working hard. It's going to be difficult, but we're still working hard to reach that 12% at the end of the year.

[Karl-Johan Bonnevier, analyst]

Excellent. And when you talk about the strong pipeline for SafePoint in the U.S., the U.S. operation, obviously, looks exceptionally good. Are there any big clients still that are looking for this on a rollout basis? Or is it more SME kind of clients that are the ones driving the business at this stage?

[Aritz Uribiarte, executive]

No. You've got very big clients looking at these solutions as well. I mean you still have the SMEs as well, but you've got big clients at the same time.

[Karl-Johan Bonnevier, analyst]

Excellent. And just on -- I noticed in the annual report that the cost of risk went up quite a lot during last year. And obviously, you had your situation in Montreal, and we saw Garda having problem in the California operation. Is there a risk that cost of risk will remain on an elevated level over the next kind of years looking at the new kind of environment out there?

[Aritz Uribiarte, executive]

No, I would say -- I mean, the only thing we could highlight here is that -- the trend of the effects that we've had in the U.S. has been very high in the past year. And the first quarter, at least the beginning of the quarter didn't start well either. It's easing down. I think it will get better, but we don't see a forecast of the cost of risk increasing in the future.

[Karl-Johan Bonnevier, analyst]

Good to hear. And Johan, congratulations to the BBB rating. I saw that your credit, say, spreads shrunk quite dramatically on it. How much do you see your financial costs can come down on this improved rating?

[Johan Wilsby, executive]

Honestly, KJ, I haven't made an estimate of that right now. Obviously, it's very beneficial with us some short-term sort of benefits of this. But it's mainly going to impact our refinancing activities when we get into H2, I would say.

[Karl-Johan Bonnevier, analyst]

And how do you see your maybe update me on how you see the spreads for the moment and where that might go?

[Aritz Uribiarte, executive]

Yes, I don't have that right in front cases. Let's follow up that one up separately, so you get a correct answer, okay.

[Operator]

Ladies and gentlemen, this was our last question.

[Aritz Uribiarte, executive]

Thank you very much for listening in. Please reach out if you have any follow-up questions. Thank you. Bye-bye.

[Operator]

Excuse me, gentlemen. We have a last-minute registration from the line of Viktor Lindeberg, a follow-up...

[Viktor Lindeberg, analyst]

Just following up on the FX business. If you could maybe help us a bit more with some color on the impact of the cycle? And if there is any inventory revaluation or mark-to-market changes that sort of hurt the profitability now or if this is more operational in the sense, if you understand the question?

[Aritz Uribiarte, executive]

It's completely operational.

[Viktor Lindeberg, analyst]

Okay. So there should not be an imminent removal of something in that sense then, I understand. And how -- looking at your crystal ball on this, obviously, macro being a bit slow, but your predictability or visibility in this business in the coming weeks, months and quarters. How can -- if you can plan for this business to maybe improve margin level from here?

[Aritz Uribiarte, executive]

You're focusing on the FX business. Sorry, Viktor, right?

[Viktor Lindeberg, analyst]

Yes. Yes, the FX business.

[Aritz Uribiarte, executive]

I mean you know that we were -- we have a restructuring ongoing that we talked about in the previous quarter. And as you say, I don't have a crystal ball. I don't know when the gold price and the precious metal price is going to go down. So it's very difficult to predict. We do expect things to [ ease ] down a little bit in the second half of the year, and that's why we expect that to come back because as you know, I mean, those type of activities are very margin-accretive for us.

[Viktor Lindeberg, analyst]

Yes. But when you look at it over time, this is maybe more a high-level question on strategic initiatives being a core part of Loomis or not given the volatility and now being a bit under pressure and also the difficulty in planning from your side, do you consider this to be a core asset of Loomis and that it has synergies with the rest of the business that is tangible?

[Aritz Uribiarte, executive]

Yes, with no doubt.

[Viktor Lindeberg, analyst]

Okay. And maybe a final one, looking at Loomis Pay, it's a small business. But looking at your transaction volumes and your revenues, it seems to be that your conversion rates are coming down a bit sequentially. There should not be too much seasonality, I guess, in conversion rates. How much revenue comes to European versus the transaction, but is there a mix change here or that there is a bit of a pricing pressure? Or how should we read that number?

[Aritz Uribiarte, executive]

Not that I know of. We don't -- we have no pricing pressure there. I would have to look into that. But I think the main effect was the seasonality. That's how I view it. But let us take a look and we can come back to you on that one.

[Viktor Lindeberg, analyst]

Okay. Yes. Now I noticed it was up in Q1 last year versus Q4. That's why I struggle to see the seasonality effect?

[Aritz Uribiarte, executive]

It could be the Q1 last year. We could have a one-off, but let us check that and come back to you.

[Viktor Lindeberg, analyst]

Yes. That's great. And just a final maybe [ send ] from me. When just be mindful of maybe how you phrase your wording on structural challenges that can be misinterpreted quite a lot in the market given that cash is the bulk of your business. I think at least I received a number of [ inbounds ] yesterday on what that actually meant, given that you mean Germany and some of the other structural measures taken rather than you're facing headwinds from a more end market perspective being a bit mindful and maybe helping each other here on that.

[Aritz Uribiarte, executive]

Thanks for the input. And thank you very much, I take that into account.

[Operator]

Ladies and gentlemen, this was our last question.

[Aritz Uribiarte, executive]

Thank you again very much for listening in. And again, reach out if there are any follow-up questions. Thank you very much. Bye-bye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.