Croma Security Solutions Group plc (CSSG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Croma Security Solutions Group, plc Half Year Results Investor Presentation. [Operator Instructions] Before we begin, as usual, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from Croma Security Solutions, plc, Roberto. Good morning, sir.

Good morning, Jake, and thank you for the introduction, and welcome, everybody, to the Croma Security Solutions Group, plc 6 months to the 31st of December 2024. I hope to give you some information that is very relevant to what we've been up to. If we can go through past our overview, for some of you who have already seen part of this presentation, but for those of you that haven't, I'd like to talk to you about the security market today as it is. Our market is very distinctly split between the locksmithing sector and the electronic security sector. Locksmiths, key cutting, safes, grills, shutters, et cetera, all physical security measures. And generally speaking, when we talk about locksmiths, they sit on their own in very, very small, fragmented businesses around the country, sometimes only a handful in each town and city. In terms of the security -- electronic security market, it's made up of larger companies, providing access control, CCTV, intruder alarm systems, communication systems. And they generally don't cross pollinate because the skill sets required in locksmiths is very different to those in electronic security. Here at Croma, we have 2 distinct companies, one in locksmithing and one in electronic security. And over our years of experience, the one thing that we have observed is that the opportunity that we are picking up on as our strategy is around, the 6,500 locksmith businesses in the country today. Now whilst that's a large number, quite a large number of the 6,500 locksmiths are single sole traders operating from a van without premises. What we're interested in is the ones with premises with between 3 and 5 staff that have been operating for a number of years with an established marketplace, and we'll talk more about that later. And when we talk about this being our market opportunity, we absolutely see it as that, and we'll explain again further later. The Croma model, which is our third circle on there is really about us being already a proven acquirer of these individual small locksmith businesses. And we then use them to feed into our electronic security division as well as broadening their capabilities as the -- in these individual lock businesses. If we just talk about the interim highlights, well, I'm really pleased that against the backdrop of a very difficult trading environment, we are up on all measures. And I'm very, very pleased that we've reported those and you've seen those numbers, no doubt already. I guess from an operational point of view, the highlight is post the 6 months, literally just post 6 months, we acquired a locksmith business in Leeds, and I'll run you through that on a later slide as well. So our network now totals 17 security centers as of January 31, and we have a strong pipeline of future acquisitions. We've also had a strong flow of new business during that period. With -- finally, on this slide, we're considering strengthening our management team in order to ensure smooth operations going forward as we expand our portfolio. So let's talk about the group today. Our headquarters are in Southampton. We have 95 employees, and we've been in business for more than 50 years in total. The 17 security centers that you can see on the right-hand side of this slide, at the bottom, you'll notice Leeds being the new one. And you can see from the map that we're starting to get around, certainly in the north, and we've got other areas that we're interested moving forward and filling in. In terms of the growth strategy, well, it's fairly straightforward. Some of you will know and those of you that have done your research will be very aware that we sold our guarding division some 18 months or more now ago. And we're reinvesting that GBP 6.5 million from the sale of Vigilant to help us in creating our national security brand. Generally, we're acquiring modestly valued independent locksmiths, and this is all part of the strategy. One of the reasons we're looking at these established locksmith businesses because we are able to buy them at very sensible levels as small businesses and add them on to what we're doing. We continue to aim to complete between 3 and 5 acquisitions per annum. We should stress we may end up doing 2 very large ones. We may do 5 small ones and that remains our target as we speak today. In terms of the acquisition and conversion model, it's well established, and we're targeting an annual return of investment of at least 15%. I have to say that on all of our past acquisitions, we have achieved that. So when we invested GBP 6.5 million, we're looking at uplift to EBITDA margin, and I've mentioned the return of investment of 15%. Turning to the acquisition that we've just made. This is a really interesting one because we've acquired Meridian Security Systems in Horsforth in Leeds for GBP 150,000, which was less than 3x EBITDA. In terms of the business, it's been well established, run by John Taylor and his wife and 4 other staff. And they are a business that has an online presence as well as some electronic security. We also acquired the freehold property from where he has traded for the last 20 years, which is a well-known location for customers to come and visit. And we've secured the ongoing brand and location by purchasing that freehold for GBP 275,000 at market value. In terms of the year, 31st of December, they generated revenues of 100 -- sorry, GBP 836,000 with PBT of GBP 46,000. And I mentioned earlier, trading for 20 years, and they've been serving their local residents and business community throughout that time. They operate from that one single store as well as their online -- successful online business. The key point here, and this is something that we look for in all of our acquisitions is that all 6 of the staff remain firmly in place to carry on that business in that location and the vendor also is confirmed to want to stay with us for the foreseeable years ahead. Our nearest store to Leeds is Bury in North Manchester, where we also specialize in electronic security sales. And immediately, we have this opportunity to lift the Leeds store profitability and meet commercial demand, which Meridian has not yet had capacity for. One of the things when we met them is that they explained that they didn't feel they could expand easily, didn't have the breadth of knowledge, which we now bring to the table, and we are already just weeks into this process, developing some of their clients to add value to our existing business in Bury. In terms of the acquisition program, we talked about 3 to 5 -- well, currently, we're on track to complete another 2 to 3 acquisitions in 2025. And this pipeline is a mix of [ cold ] targets and a growing number of recommended targets. I think because of the success of our previous acquisitions, the industry are all talking to each other, and we're now starting to see people contact us and ask if we're interested in looking at their businesses. Some of you, again, will know, we have a very stringent process for ensuring suitability or a term that I use all the time, which is survivability of those businesses under our control. We have not publicly stated how big our pipeline is, but sufficient to say we have many opportunities, and hence, why we're considering expanding our management team to give us more time to dedicate to expanding in this sector. The market is interesting because it continues to be little or no competing buyers. And I think that's not anything unusual because these are small businesses for which most companies would not pick up, and it needs a lot of expertise, which we have in our business to convert them and consolidate them and turn them into higher EBITDA margin businesses. And therefore, pricing in the sectors remained stable. We were able to buy at very favorable rates. In terms of the current real estate, we have 9 freeholds and 8 leaseholds. We often get asked the question while we're buying freeholds. Well, it's a very simple answer. Freeholds secure the established trading locations. They also reduce our operational costs. And whilst we have now GBP 3 million tied up in property, we mustn't overlook the fact that our bankers stand ready to give us up to 90% on drawdown against that GBP 3 million should the need arise if our acquisitions accelerate to the point where more cash is required over and above the cash we already have in the bank. The GBP 2.5 million we still have to receive and the fact that we remain very cash generative. So let's talk about the store transformation model. Typically, these are family-owned businesses. They have a limited product range because like all industries, the locksmiths have exactly the same thing. And if we liken it to the motor industry where there are so many brands in the market, you cannot be an expert in all of them. I'm very pleased to say that across our 17 branches, we cover just about every product that's in the market and where we have a branch that may not be experienced in a particular product, they can draw down on our knowledge and access to those products from other branches. It means when a customer walks into a shop with an unusual requirement for that particular local area, they can source that through the group very, very quickly. They tend to have a lot of local customers, and we must remember that they deal with schools, hospitals, the general public and the trade. One of the things that's common in all of these locksmith businesses is that they have limited back office, and we're finding that in many of the acquisition targets, they don't even have really strong bookkeeping, and they tend to hand that over to their accountants for high fees. And that is an immediate saving to our business because we transfer accountancy into our central headquarters straightway. The other thing that we noticed in these businesses, they have low operating margin because they're trying to juggle too many balls with too few staff. They have limited buying power because they're small. And their typical revenue, we put down GBP 0.2 million to GBP 1 million. But of course, there are those with higher turnover than GBP 1 million out there. And some of those are also targets for us to acquire. In the middle of this slide, you'll see the words the Croma effect. What is the Croma effect? What does it mean? Well, it means when we take over these businesses, generally speaking, we will take them from single digit to double-digit EBITDA margin. We have group procurement powers, which they don't have. We have rebate schemes set up with most manufacturers and on to annual turnovers, we will receive additional refunds against our spend. We're looking at a return on investment target of 15%, and Teo, our CFO, here to my right, keeps a very close eye and control of what's happening on that front. And of course, when these businesses are sitting under the Croma banner, they become group owned. They become part of the national network, and we do have some national accounts, and we're already transferring some of those orders into those branches instead of contracting them out or making the long trip from our existing locations to service those accounts. Of course, they have their local customer base, which we can expand services to and they can also start supporting our national customer base. I think the final point about store transformation is the centralized group services Again, some of you will be aware that we have our own IT team here with software writers, and we have written our own software that gives us electronic control and very, very good information coming back from all of the spend in these stores. And that is something that pushes them towards paperless and gives us sight on minute by minute on each of those shops. If we talk about the financial review, which we covered earlier, I said I was very pleased with the numbers. As you can see, revenue, gross margin, EBITDA, all of those numbers are up. Cash and cash equivalents are up significantly in general terms, whilst that's such a high run in half year '24, some of you that have read the reports will realize that we did collect another couple of million pounds. So we've moved forward slightly. On a like-for-like basis, our revenue grew by 4%, and we still have this further GBP 2.5 million that I mentioned earlier that's due in from the disposal of Vigilant, and that is to be paid over the next 6 quarters. So let's look at our 2 divisions, locksmith and electronic security. So our locksmiths at the moment, you know the presence is across the 17 security centers. And of course, we are actively seeking to grow that number. In terms of customer base, all of these locksmiths that we hold in the 17 centers and the proposed targets for acquisition tend to have a loyal customer base with high recurring revenues. I think this is an important factor to understand how safe these are as acquisitions because most of them supply master key systems to the local authority, schools and hospitals that I mentioned earlier. And those master key systems are locked into those businesses. So whilst we don't have contractual paperwork tying those clients to those local stores, they do have a product that can only be serviced through their local center with registered keys. And that is our reoccurring revenue walking through the door all the time. In terms of the revenue drivers, well, of course, replacement and upgrades of locking systems is standard. Key systems have a life, albeit a very long life. They also have to be replaced in the event of lost keys or breaches in security and just general improvements. So there is always upgrade work required across most clients these days. Of course, growing crime levels and the increased -- sorry, the associated increased safety concerns that the general public hold is another driver for our business. The other driver, of course, is growth in housing. And one important part about locking is innovation. We are an innovative bunch, and we like innovation and introducing that to clients. iLOQ is 1 of those products. And whilst we are still in its infancy, in the U.K. We are seeing a lot more interest in the hybrid locking that bridges the gap between physical and electronic security. And just to finish off there, iLOQ is a purely mechanical system, but it draws power over a 3-millimeter air gap from the back of telephones to activate these locks, populates the database as to who is opening the door and at what time. And yes, it's a very effective product, and we will see some change in our industry going forward. In terms of the final bullet on this locksmith slide, it is a natural bridge into fire and security. And one thing we should be clear on is that whilst clients may spend on locks and keys, they tend to have a far higher spend when it comes to electronic security. So surveillance cameras, alarm systems, access control systems, et cetera. So picking up strong clients that trust those local locksmiths already with their locks and keys is not a difficult sell to our clients to suggest to them that we might want to come and service their electronic security. When we move on to the fire and security slide. Well, our presence is headquarters down here in Southampton. And we also have another division in Bury in Greater Manchester. So we have engineer bases in both locations. In time, we plan to expand them into other areas and other centers. The sector focus for fire and security, health, leisure and entertainment, schools, utilities, government and Ministry of Defense. These are all clients that we work with consistently in our electronic security systems business. Again, the revenue drivers, interestingly, compliance with private and corporate regulation. There is an awful lot of legislation coming into force and a lot of which is already in force and still many companies are flouting these regulations. As experts in our business, we understand those regulations, and we are able to articulate those to clients. And we find many people in our industry are not playing the compliance card correctly, and advising their clients correctly. Whilst it leads to greater spend for those clients and perhaps they're uncomfortable conversations, there are black and white regulations that people should follow, and we are very good at articulating that to our clients. Innovation, we mentioned earlier through technology. Again, we are early adopters of good, not leading edge, but we try and test all of the new technologies as they come out. And when we are satisfied, we introduce these very early to our clients to enhance and bring better results in their security. Again, growing crime levels and associated increased safety concerns is a driver in fire and security. I don't expect you to understand the fourth bullet point. But for the uninitiated, Martyn's Law. Martyn lost his life at the Manchester Arena when we had the bomb there. And that is a piece of legislation passing through the House as we speak. And it will bring this Terrorism Bill to play in open spaces where we have ticketed events and large gatherings. And all of those numbers underneath, as I said, I don't expect you to know what they are, but they are relevant standards that should be applied for escape mechanisms used on doors. Currently, the U.K. has not even begun to address all of the concerns in that area. It's a massive marketplace to put the right hardware on those doors and escape routes to buildings and venues. So finally, let's talk about the outlook. Well, we've entered an acquisition-led growth phase. We're very much moving at a pace now with this. We've completed the Leeds acquisition this year in January on the 31st. We've got the strong pipeline, and we're on target to complete a further 2 to 3 similar transactions in 2025. We've got an excellent financial position with cash resources to fund our rollout plan, and we expect to see the compounding benefits of these acquisitions contributing to sales and profitability. Trading for this first half -- or sorry, second half has begun well and we are well positioned to complete a successful year. And finally, net assets per share moving from GBP 1.09 to GBP 1.11. I think that sums it, up from our perspective, and I will be very happy to move on to answering some of the questions that we have on the screen.

So if we go to the top, please,[ Izzy ], of those questions, I think our first question, how confident are we in receiving the balance of payments due from Vigilant sale? This is a reoccurring theme and a lot of people keep asking that question. But every time they ask that question, we really give the same response. There is no certainty in life. We don't know fully the answer, but are we confident? Yes, we are confident. Why are we confident? It's because we've received all payments to date, and they are the majority of the way through making all those payments. We have a director on their Board that we placed. We have constant updates and reports on performance. And it would seem ridiculous for them to fail to make their balance of payments at this stage when they've already invested so much in buying out that business. So whilst nothing remains certain, we are confident that we will see those payments come through. Now the next question. I can see from [ Gary V ], it says with a mix of 9 freehold and 8 leasehold properties will future acquisitions prioritize freehold locations for better long-term control? Thank you, [ Gary. ] Good question. Again, my answer remains the same on that because if we think the location is relevant to the footfall, and it's a long-established location, then of course, we're going to want to try and control it if we can. But we are open to leaseholds and freeholds. It's all dependent on each and every case. So in terms of what percent -- sorry, next question, [ Michael ] out of the 6,500 U.K. locksmiths approximately, how many locksmith meet the 3 to 5 staff with premises threshold. Again, a very good question, [ Michael ], because that will tell us how many we can acquire. I think there are more of them than we can probably acquire in my time. So I would suggest there's at least 1 to 2 in every city and town in the U.K. Next question, sorry, they're flying around on the screen here. So what percentage of national accounts is contracted out to third-party locksmiths. I'd like to say that's actually a very small amount. I would think it's probably nearer to a single digit of 1 or 2 if that. We control most of the works through our own locksmiths, we occasionally for a small quick support call might place it with a contractor. So a very small amount. In terms of the 17 centers, again, [ Michael ], how many offer master key services, every single one of them, and they all have the ability to provide master key services and do so. Next question, again, [ Michael ], what percentage of corporate and commercial customers use both locksmith and fire and security products? I'm not sure if you mean what percentage globally or of our clients. Could you hold that question on screen there because I can't see it. What percentage of corporate and commercial customers use both locksmith and fire? I think you're asking the question within our business. I would say that I don't know is the honest answer, the total percentage. What I do know is we have thousands and thousands of locksmith clients, and some of which literally come in for a few keys and a few locks. So I would say it's a small percentage of people, whereas if you look at our electronics systems, almost all of those clients that we provide them, they also buy locks and keys from us. Next question. Okay. So what percentage of your revenue is retail individuals requiring a key or new locks and what is corporate? Again, difficult to split, but I would say it's a 30-70 split, possibly less than 30, actually, in retail. We have a lot of commercial work that comes through the doors. And one of the areas where we're very strong is that we have lots of tradesmen driving around that have got jobs to fix. A housing association would be a good example of that, where they have trade staff that have to fix window locks, door locks and they come into our shops to pick up replacement components on the day. So that they can secure a door or secure a window. Now whilst they can order those parts, they generally won't get them for a day or 2 from other suppliers. So we are the convenience of turning up -- picking up the components and servicing clients same day. So we have a lot of recurring business and growing from trades people coming into those stores. I don't know if I'm running out of time.

No, not -- forgot that. [ Izzy ], can you scroll up. There is another, it's annual -- do you charge an annual fee for master key customers? Second part of the question.

Right. So we do not charge an annual fee to master key customers. Those customers are locked in every time they want a new lock, every time they want additional keys. They have little choice but to come to us to expand their system for them. So unless they want to write off their investment and switch to another supplier, they are very much locked in to coming to see us for that service. The only area where we do charge annual maintenance fees in the locksmithing business is 1 of our very large entertainment clients across the country, where we have annual servicing of safes and safe deposit tubes and locks on their side. So we have maintenance contract to perform those duties for them.

ILOQ [indiscernible].

A very good point from Teo. Thank you. So there is a reoccurring revenue for iLOQ. ILOQ being a hybrid, I mentioned this earlier, it's a locking system that is mechanical but draws power from mobile phones to activate it. Because it's a software-driven product, there are annual licensing fees for the app on the telephone of the user as well as the license fee for each lock that's installed. So we've installed 1,200 plus now of those locks in the country, and each one of those brings in reoccurring revenue in terms of software licenses. Next question. Can't read that, sorry. As the business grows -- good question there. As the business grows, do you consider adopting some sort of apprenticeship program to expand the business? It's inevitable but we have to do that, and we are very active in our locksmith branches, bringing in when we acquire a business, sometimes one of the first things we do is bringing in a youngster, an apprentice that can start learning from us because our industry is an aging industry. The targets that we're buying tend to be people who would have run their businesses for some time, but have not had the ability to invest in bringing new people through apprenticeship. So yes is the answer. We are already actively doing that and training people within our business, and we plan to continue doing that for obvious reasons. So [ Matt G. ], are you likely to move towards larger mergers and acquisition targets as the scale of the group operations increase? I think the answer is, of course. We have to be mindful that this is a fragmented industry, as I mentioned earlier. And therefore, there aren't a great number of big targets out there. But there are certainly some larger ones. And absolutely, we have an appetite to pull them on board with Croma. I think that's my questions. So thank you very much, and I better hand back to Jake.

Perfect Roberto. That's great. Thank you for your presentation and for being so generous of your time then addressing all of those questions that came in this morning. But Roberto, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments just to wrap up with and that would be great.

Thank you, Jake. Well, really, my closing comments are to thank everyone for their interest in Croma. I hope they're as excited and passionate as I am about what we're doing here at Croma. And I look forward to really giving everyone further updates in due course because we find this a useful way to communicate what it is that we're up to here at Croma. So I would just say thank you very much for your time, everyone.

Perfect. Roberto, that's great. Thank you once again. For updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Croma Security Solutions Group plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.