Loomis AB

STO:LOOMIS

Earnings Call Analysis

Strong Revenue and Margin Growth with Shareholder Returns

Loomis achieved a record-breaking Q2 2024, with revenues surpassing SEK 7.6 billion and a 7% organic growth. The operating margin increased to 11.6% due to volume growth and efficiency. Cash handling automated solutions saw double-digit growth, especially in the U.S. and Europe. Loomis returned over SEK 1 billion to shareholders via dividends and share repurchases. A new share buyback program for up to SEK 200 million was announced. The company remains focused on improving margins and operational efficiency, with a resilient outlook for future growth.

Strong Revenue Growth and Record Performance

In the second quarter of 2024, Loomis reported remarkable financial results, achieving revenues exceeding SEK 7.6 billion. This represents organic growth of 7%, driven by a combination of strong performance across all segments, particularly in Automated Solutions, which saw double-digit growth in both the U.S. and Europe. The overall growth reflects a robust recovery trajectory as demand for cash handling automated solutions surged.

Improving Operating Margins

Loomis's operating margin reached 11.6% in Q2, an increase attributed to enhanced operational efficiencies and robust volume growth in the U.S. segment, which reported an impressive margin of 15.2%, up from 13.9% a year ago. The focus on optimizing costs, particularly in the European and Latin American regions, is showing promising results and is a key pillar for future margin expansion.

Significant Shareholder Returns

In a clear sign of commitment to shareholder value, Loomis distributed over SEK 1 billion this quarter through dividends and share repurchase initiatives, including the cancellation of approximately 4.3 million treasury shares. Furthermore, a new share buyback program has been authorized, allowing for repurchases of up to SEK 200 million in the third quarter, reinforcing the company's strategy to return capital to shareholders.

Segment Performance: Europe and LatAm

The European and Latin American segments reported the highest quarterly revenues ever, supported by price increases and growth from emerging markets. Specifically, the operating margin in these regions improved to 11%. However, the international business continues to face cyclical headwinds, with expectations for a turning point towards the end of the year.

Restructuring for Future Gains

Further restructuring initiatives were noted, particularly in Europe and Latin America, aiming to bolster margins and operational efficiencies. The company has communicated that expected savings could range from 30% to 40% higher than the costs associated with restructuring programs, suggesting a positive outlook for profitability in the near term.

Robust Cash Flow and Future Guidance

Loomis reported a strong cash conversion ratio of 92% for the quarter, highlighting effective cash management and operational stability. Looking ahead, while some challenges remain, particularly in international operations, there is cautious optimism about recovery in cyclical segments by year-end as the company adapts to evolving market conditions.

Commitment to Sustainability

The firm continues to prioritize sustainability, illustrating efforts to reduce carbon emissions while enhancing operational safety. With pledges aligned with science-based targets, Loomis is positioning itself not only for financial returns but also for responsible environmental stewardship.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the Loomis Q2 2024 Report Conference Call. I am Dorvin, the Chorus Call operator. [Operator Instructions] At this time, it is my pleasure to hand this over to Mr. Aritz Larrea, President and CEO.

[Aritz Uribiarte, executive]

Thank you very much. Good morning, everyone, and welcome to the second quarter presentation for Loomis. My name is Aritz Larrea, and I'm the CEO of Loomis. And with me here today, I have our CFO, Johan Wilsby; and Jenny Boström, our Head of Sustainability and Investor Relations. I will begin by giving a brief review of our business performance in the second quarter and an overview of our results before taking questions.

Let's start the presentation by turning to slide #2. We had a record quarter in terms of both revenue and operating income. We achieved revenues above SEK 7.6 billion with growth across our 3 segments and most business lines. Acquisitions had a positive impact on our revenue, while the changes in currency rates had a negative impact due to hyperinflation currencies. We achieved an organic growth of 7% despite continued cyclical headwinds in the international business line. The demand for cash handling automated solutions continues to be high, and we have had double-digit growth for automated solutions in both the U.S. and Europe, even when excluding Cima.

Our operating margin increased to 11.6% in the quarter, with improved margins in both regions. The U.S. segment had a great performance with a combination of volume growth and continued focus on increasing operational efficiency, but I'm also pleased to see that our ongoing efforts to improve margins within the European and LatAm region are starting to yield positive results.

Allow me to further address these drivers in more detail later when we run through our segments. The operating cash flow for the quarter was very strong. Keep in mind that we did have a positive effect of the timing effect from the first quarter in these numbers as well. 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 92%.

This quarter, we returned over SEK 1 billion to our shareholders through a combination of our annual dividend and our share repurchase program. We also permanently reduced the number of outstanding shares by canceling close to 4.3 million treasury shares. Demonstrating our continued commitment to shareholder value, we announced yesterday a new share buyback program for the third quarter. The Board of Directors has authorized a repurchase of up to SEK 200 million worth of shares during the period.

Let's turn to the next page and address our reporting segments, beginning with the Europe and LatAm. The positive trend in revenue growth in Europe and Latin America continued, and we reached our highest quarterly in revenue. Our operating margin increased to 11%, which is a substantial increase both compared to the first quarter and to the previous year. Price increases as well as growth from emerging markets were the main contributors to the organic growth.

Our automated solutions with SafePoint and recyclers had a double-digit growth on a stand-alone basis, and Cima had a positive contribution to the business line performance as well. We're still seeing a continued decline for our international business. It's too early to say when this cyclical impact will trend back. However, we hope to see it reverse by the end of the year.

We are actively examining our operations throughout the region to make sure we are best positioned for future growth. The goal of this analysis is to pinpoint the optimal footprint, capacity and competencies required for success.

As I mentioned earlier, we therefore booked additional restructuring charges in the quarter as part of this process. A key to reaching our margin target for 2024 is to recover our margin in Europe and Latin America. This would require both continued efficiency gains and restructuring strategies.

Let's turn to the next page over to the U.S. The U.S., that 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 to increase our business. Revenue and operating income were our highest ever. Our organic growth was 5.9% and includes a robust volume growth. All business lines grew apart from international, which was down compared to prior year.

I want to highlight that the automated solutions business with SafePoint achieved double-digit growth for yet another quarter in a row, and we see a strong pipeline ahead. We reported a strong operating margin of 15.2%, up significantly from 13.9% in prior year. This is driven by a strong volume growth in addition to our structured work on operational efficiency.

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 28 million. Transaction volumes increased both compared to the same quarter last year and the first quarter and reached more than SEK 1.8 billion.

The Spanish POS provider that we acquired in the prior quarter has now been integrated into our Spanish operations. I would also like to share that we have a new partnership agreement for the Norwegian market.

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're 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 see a sharp drop in the injury frequency rate compared to prior year and quarter. We will, of course, continue to strengthen our proactive measures for our employees' well-being.

Even with the strong organic growth, we continue to decrease our carbon emissions from fuel consumption and energy usage in absolute terms. In June, we committed to the science-based targets initiative to set science-based emission reduction targets in line with the Paris climate agreement. I look forward to sharing these targets with you once they have been submitted and validated by the SBTi.

Let's turn to the income statement slide, where I will start by highlighting the strong growth where our real growth, excluding currency, is close to 10%. As I mentioned, we have further restructuring costs with the restructuring plan in Europe and Latin America. We have also made the provision for the administrative fine that our Swedish subsidiary received from the SFSA. But I would also like to highlight that the increase in net financial items is largely a result of increased interest rates, where the majority of our financing, as we mentioned before, is with variable rates.

Moving on to the next slide, I just wanted to highlight our performance in relations with 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. Remember that the rolling 12 months includes the nonrecurring items that occurred in the third quarter. While we have a way to go towards closing the gap for our margin target, we are working hard towards getting there.

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 would be higher at the beginning of the period with the Covid recovery. Thanks to growing revenues and dedicated work on improving our operational efficiency, our margin increased in both the U.S. and Europe. We will continue to work towards reaching our margin targets at the end of the year.

Cash conversion ratio, both for the quarter and 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.

In the second quarter, we distributed more than SEK 1 billion to shareholders via the annual dividend and share repurchases. Additionally, we canceled close to 4.3 million treasury shares. The Board of Directors has decided to continue with share repurchases in the third quarter for the amount of up to SEK 200 million.

As I mentioned before, keeping our employees safe and minimizing the risk of injuries is one of the 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 employee safety.

Our investments in a lighter and more technologically advanced vehicle fleet is thus twofold. With new innovations and higher security features, we can both further improve the safety of our co-workers while also reducing emissions. As we further work on optimizing our routes, we are decreasing our emissions from transportation even as we grow our business volumes. Our commitment to the science-based targets initiative shows our dedication to keep reducing our carbon emissions.

With that, I'm done with my summary of the second quarter of 2024. So, let's turn to Q&A. Operator, we are now open to questions, please.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Viktor Lindeberg with Carnegie.

[Viktor Lindeberg, analyst]

Looking at your cash flow statement, I was just curious to see if you can elaborate a bit on the CapEx levels in the quarter? And if you think this is a new steady-state level relative to where you've been in the past year or so or if there's something around the corner that we should be mindful of when that may pick up again?

Second, looking at Sweden, you record negative organic development now after a quite strong period. But we know that the Bancomat contract will end at some point in the coming 12 months. And maybe if you could quantify timing and then quantum of how that should affect your Swedish business and maybe put that in a group perspective as well, starting on those 2 CapEx in Sweden?

[Johan Wilsby, executive]

Viktor, this is Johan. On CapEx levels, we typically don't plan on quarterly levels. So yes, we're slightly down in the quarter. I would expect over time that we keep optimizing this item, especially in relation to revenues. So, it's in the right direction, but we don't guide by quarter.

[Aritz Uribiarte, executive]

Viktor, this is Aritz going now to your question around Sweden and Bancomat . As you know, we never comment on specifics around our relationship and contracts with customers, but we constantly adapt our operations to changing market conditions. And in Sweden, we will optimize the resources that we use to make the operations efficient.

The important thing is that we remain committed to the Swedish market and our role in ensuring that cash is available and at the close of cash [indiscernible] in society . And we see it as positive that the Swedish banks want to support cash in society as well. Although it is important also to have in mind that the total revenues in Sweden amount for approximately 3% of the group's total revenues.

[Viktor Lindeberg, analyst]

Okay. Maybe following up. I was a minute late into the call, so excuse me if you already touched upon this, but you mentioned in your CEO letter, Aritz, about consolidation of branches and the costs associated with that. Can you give us a bit more granularity on country level and if this is Swedish related to or more European broad-based?

[Aritz Uribiarte, executive]

I just start by saying that it's not Swedish. And we don't go into specifics when we talk about the country. So, we've taken a broad approach across the whole European and LatAm region. So, as I said -- I mean, we're actively examining our operations throughout the region just to make sure that we are best positioned for future growth. The goal of all this analysis is to pinpoint, as I said, the optimal footprint capacity and competencies required for success, but again, it's not focused on Sweden, it's focused on all the European countries.

[Viktor Lindeberg, analyst]

Final from my end before I get back in line, on Europe and profitability. I think now you seem to be in a better position to have a better match on cost inflation and price adjustments now coming through, especially compared to last year when inflation was running high. How do you look upon the second half of this year on European prospects to defend and actually expand your margins now for the remainder? I mean what beside from what we already know about Germany and a recovery in the cyclically sensitive business in the international segment is driving this, if you think you will be accomplishing that? Maybe just to pinpoint a few words on profitability there in Europe?

[Aritz Uribiarte, executive]

Again, without going into specifics when it comes to countries, I mean we keep analyzing what needs to be done and the needed adjustments. I think you've seen some restructuring charges in items affecting comparability this quarter. I do expect to have additional restructuring charges in the following quarters as well. But as a summary, we do expect those savings to be around 30% to 40% higher than the cost going into the program. So that will mean a margin expansion in the following quarters.

[Operator]

The next question comes from KJ Bonnevier with DNB Markets.

[Karl-Johan Bonnevier, analyst]

And looking at one of the challenges you have still, international operation, do you feel that that's now stable on a low level? Or how do you see that business developing?

[Aritz Uribiarte, executive]

Yes, I think it's stable on the low level. I mean we've seen a slightly improvement versus Q1 in Q2, but a very low increase. And we still don't have the full visibility on when it's going to be fully back, but I don't expect it going down more than that it has done already.

[Karl-Johan Bonnevier, analyst]

And you mentioned in your initial comments that you see volume growth in quite a few segments. Could you elaborate a little on that? And where do you take market share while you grow with the market [indiscernible] and similar things?

[Aritz Uribiarte, executive]

I mean, the most important one is when you see the automated solutions in both regions, I mean, with double-digit growth. That is clear. The main difference is that when you talk about the U.S., you're talking about new customers coming in. And when you talk about Europe, it might -- you might be cannibalizing some CIT and CMS business. So, you do see in Europe, CIT/CMS a little bit down and automated solutions being up, while in the U.S., the main driver of growth is automated solutions.

[Karl-Johan Bonnevier, analyst]

And Johan, maybe you can help me with some housekeeping question. Looking at the financial net, how large is the IAS 29 impact and the IFRS 16 impact on that?

[Johan Wilsby, executive]

I don't have that in front of me right now, KJ, I can get back on that, but there is no big changes really depending on the interest rate in the quarter. So, I'll get back as soon as I looked it up, okay?

[Karl-Johan Bonnevier, analyst]

And I also see that you mentioned now in the presentation, lower effective tax rate. What should we calculate with for this year? And how do you see that developing going forward?

[Aritz Uribiarte, executive]

I see it compared to the beginning of the year now with a refreshed forecast and obviously, there are different movements in different countries. I see the tax rate coming down slightly, and you see a result of that in the quarter compared to Q1. So further than that, I can't guide on right now.

[Karl-Johan Bonnevier, analyst]

But 25% or lower, that should be a good proxy at least?

[Aritz Uribiarte, executive]

No, no, not 20%. We're 28% in the quarter, right? So not 20%.

[Karl-Johan Bonnevier, analyst]

Okay. I'm adjusting for all the [ IICs ] to get to the underlying tax rates.

[Aritz Uribiarte, executive]

Okay. No, but you should think about the effective tax rate of 28% as a good proxy for right now.

[Operator]

Thank you. [Operator Instructions] We have a follow-up question from Viktor Lindeberg from Carnegie.

[Viktor Lindeberg, analyst]

Coming into the shorter-term trading and how maybe Q2 ended for you and how you see Q3 evolving so far; even though it's early days, it is a seasonally very important quarter for you. So maybe June could provide some insights on how we are trending now in the tourist season, starting on that point?

[Aritz Uribiarte, executive]

Yes. I mean it's -- we've already informed about all the challenges, and we talked about the cyclical parts of business hopefully coming back at the end of the year. But we shouldn't expect anything different to the normal seasonality that we had in previous years when it comes to the European and LatAm region. So, there's nothing that indicates that Q3 will not follow that seasonality pattern in Europe and LatAm.

[Viktor Lindeberg, analyst]

And on Loomis Pay, I think the acquisition contribution was a bit bigger than I anticipated in the quarter. So, can you elaborate a bit on what -- is there a one-off deviation on the growth coming from this acquired company? Or is it simply just trending strongly when looking at the growth that this acquisition has on its own organic merits?

[Aritz Uribiarte, executive]

I mean, Hosteltáctil, that's the POS that we acquired in Spain. They have annual revenues in 2023 of SEK 1.5 million. And of course, it's margin accretive compared to our Loomis Pay business line. I don't know if you need anything else or you're asking for something else. We had a strong performance there in Spain, things are looking good, but still early stages still, and we have just integrated them. So, it's a bit early to say [indiscernible].

[Viktor Lindeberg, analyst]

Yes. I was just looking at it, I think you had about SEK 8 million of contribution on top-line from that acquisition. And just wondering if that is something we should annualize because then it suggests more like EUR 3 million of revenue run rate than the SEK 1.5 million you mentioned.

[Aritz Uribiarte, executive]

One additional thing on Hosteltáctil is that we integrated them in Q2, and we did that from 1st of March. So, we actually have 4 months into the quarter.

[Operator]

There are no further questions at this time. Members of the management, would you like to add any final comments?

[Aritz Uribiarte, executive]

Yes. Thank you very much all of you for listening in. Please reach out if you have any follow-up questions. I wish you all a happy summer vacations. Bye-bye.

[Operator]

Thank you. 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.