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

Good morning, and welcome to the Croma Security Solutions Group plc FY '25 Results Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to CEO, Roberto Fiorentino. Good morning to you.

Good morning, Alex, and thank you for the introduction. Welcome, everyone, to the FY '25 results presentation for Croma Security Solutions Group plc. Some of you have seen this before. Hopefully, we've updated some of our data, so it's not too boring, but welcome, everybody. My name is Roberto Fiorentino, and this is Teo Andreeva, the Chief Financial Officer for Croma Security Solutions Group. I'd like to start with the security market today. So next slide, please, Alex, in terms of the overview. Some of you will have seen this. It's slightly updated from last time. It's very, very clear that we still have a market opportunity and expect this to be present for some time yet. Currently, there is no U.K. national security center network. And to define what we mean by that, it's a locksmithing business that also works in the electronic security sector. Our opportunity sits with the U.K. market, which is made up of individual locksmith stores and independent traders. That number has shifted downwards, and I'm sure that is exactly in line with our expectations as smaller locksmiths are disappearing from the U.K. Well, across the country, we're seeing them closing shops and disappearing. The ones that we find that we take on board, those are our opportunities and the Croma model, which is as a proven acquirer of individual and small locksmith stores is to join these businesses together and develop them, and we are buying them very economically and we'll continue to do so. In terms of the group today, we've got 16 security centers as of today. Of course, at the year-end, there were more. We'll talk about that a little later. We are headquartered in Southampton, currently 95 employees and 55 years in the business. The locations may be a little small for you to see on there, but they are listed in this presentation. I'm sure you all have access to an electronic version. In terms of the FY '25 highlights, revenue up 10% to GBP 9.63 million, EBITDA up 10% to GBP 1.17 million. The margin on operations is the same as it was last year at 12.1%. During that time, we acquired 2 locksmith businesses, one in Peterborough and one in Leeds. The one in Peterborough is the second locksmith we'd already acquired previously at Peterborough Locksmith. We now own both of them and have merged them together. And we've got a strong balance sheet, as everyone is aware, with no borrowings and cash sitting at GBP 4.3 million as of -- well, as of June, of course, that's now risen with another repayment in. Proposed final dividend, 2.4p. In terms of trading for FY '26, it's on track with new stores performing well. A further GBP 1.2 million is due in stage payments by June '26 as part of the consideration of the sale of Vigilant after we already received the September quarter payment. We started expanding the management team with key new hires to support our accelerated growth, and we have a growing pipeline of potential acquisitions, positioning the group well to meet its target of acquiring 3 to 5 stores per annum. So why invest in Croma? Let's talk about our growth strategy. We are reinvesting the proceeds from the sale of Vigilant, but not only those proceeds, of course, we're cash generative. And each year, we are growing our business and creating more funds. We have an acquisition-led rollout of the group security center network, and we'll continue searching out these locksmith businesses to acquire. And again, we will talk in detail a bit more about those later. We have been acquiring modestly valued independent locksmith stores, covering them to -- sorry, changing them to security centers with broad product ranges. So what we're really doing here is taking the locksmith business, adding our layers of service that we do from other divisions and we are going to those clients that have been working for years and years with those locksmiths and then telling them about our new services in the electronic sector and of course, our new division of industrial doors, which has started to see some impact this year. We continue to aim to complete 3 to 5 acquisitions per annum and the acquisitions and conversions model is well established, and we're targeting an annual return of investment of at least 15%. So the highlights, of course, investing the GBP 6.5 million from Vigilant along with what else we're generating, uplift in the EBITDA margin on what it is that we're buying and of course, aiming to exceed that 15% return on investment. So the question of why locksmiths, we've been asked many, many times. Our locksmiths currently are operating from 16 locations. The customer base for those locksmiths is a very loyal base with high recurring revenues. Whilst they are not contracted, many of the clients of these locksmith businesses have master key systems in hospitals, schools, government buildings and commercial premises. Those master key systems usually have restricted key sections, which mean the clients must return to that locksmith to expand the system and have additions from time to time. That embeds us very firmly with those clients. So of course, when we're looking at our targets, we look at targets that have master key systems out there so that they make sense on takeover, whilst not contracted, as I said earlier, it does mean we see the recurring revenue and it supports the turnover of that business often when others buy businesses, they see an attrition rate. For us, it's very, very stable. The revenue drivers in our business, of course, replacement and upgrades due to increased safety concerns, growth in housing and of course, our innovation through technology, which we're always on top of looking for the latest technologies to implement for our clients. Of course, the locksmiths are the natural bridge into fire and security. Whilst these are very generic percentages and should not be taken as read, it's fairly typical for an organization to spend maybe 20% or less on keys and locks, whilst the other 80% of their security spend will be diverted to closed circuit television access control and fire as well as automation. So we can see very clearly why there is an opportunity when buying locksmith businesses and turning that turnover into something larger. So the targets, local and independent trusted reputations, usually 1 store, sometimes 2 stores. They tend to be family-owned businesses with -- well, trusted family-owned operations and they're looking for an exit strategy or a succession plan. Some of the businesses we acquire, the owners wish to stay on for a few more years and work with us, and that suits us down to the ground. There are, of course, occasions where the owners want to leave. We look very carefully at the business and the staff within the business to understand if it can be -- if it will be survivable without the principal there. And if we find that we can tick all of our criteria when we do due diligence, that means it's a good target to acquire. Because we are cautious, we speak to many, many businesses. And of course, we disregard quite a number because we want to make sure the ones that we proceed with are a good fit for this business and are going to support the growth that we have planned. Most of those locksmith businesses, of course, have limited back office because it's a 3, 4, 5 person operation. So when Croma comes along and provides administration, accounting processes and our -- overlay of our software, we remove an awful lot of the drudgery, shall we call it, that these people have to run through, and we release them to do the job that they're good at, which is being locksmiths. Many of those businesses have limited product ranges. They're too small to carry everything. Across all of our sites, we have almost every single brand of lock cylinder from all the manufacturers globally. That means if a particular site does not specialize in an area, one of our other sites probably does. And instead of turning clients away when they come in to talk about a particular product, they can now draw on the resource of the group. They also have access to see all of our stock in all of our sites from the new [ TIL ] systems that we install. A lot of these are low operating margin businesses because they're small and because they've got the overheads of dealing with all of the entry-level prices for insurance, for software, et cetera. And as soon as we bring them under the banner of Croma, we consolidate a number of those costs, which allows us to see an uplift in margin. In terms of the acquisition track record, we've listed a few here that explain a little bit about the location, the turnover and the summary of those businesses and DH Jones, Safecell, City Locks, Attle, Meridian and Benn, and you can see the dates of those acquisitions. Some of them come with freehold properties, some of them with leasehold. And when we look at Benn, the final on the right-hand side of the page, we have merged them into City Locks where we bought freehold and we are disposing of the lease that Benn operated from and now City Locks and Benn operate from our owned building. So how do acquisitions drive value for Croma? Properties can be merged. We've just said that. Leased or purchased freeholds can be rented for additional income. Where we purchased some of the buildings because they're in secondary and tertiary shopping areas, they tend to be formerly residential properties that have now become shops below with still an apartment above it. We are now converting some of those and renting them out to gain extra revenue from them. The products, well, we have expanded product ranges into fire and security and industrial doors with opportunities for cross-selling. And these are genuine opportunities because if you're dealing with a client from master key systems and they are a trusted customer, it's a very easy conversation to talk to them about can we do other and provide other services for them. Of course, infrastructure, we save on administration costs by implementing centralized group services with our modern software. Some of you will have heard this before. The software is our own IP. We've built it in-house. It is bespoke for our industry or for our business. We don't sell it to anyone else. We have the benefit of this very slick software that we designed around our operations. What it means for some of the smaller locksmith new business, the ability to take on larger jobs and we've done this on a number of occasions. Some of those businesses have turned work away. We can provide support now with a larger team and allow them to feel comfortable to take on larger projects. In terms of pipeline, significant current pipeline with 3 to 5 acquisitions expected to complete in FY 2026. So after a period of slower activity, pace of acquisitions is now expected to increase. Current prospects are at the larger end of our typical targets. We expect to have a step-up in sales alongside completion of current pipeline in FY '26 and FY '27. If I may, I'm going to ask Teo to talk you through the financial review.

Thanks, Roberto. If we start from the first financial slide, revenue. Revenue grew by 10% for the period, which is very similar to last year. Gross margins, there is a slight dip in margins. But if we exclude the extra provision that we have made on stock for the new additions, the gross margins are actually around 45%. EBITDA, again, similar to revenue, 10% increase. Earnings per share is 45% increase. But I would just one note, there was an over provision for tax last year. So earnings per share if you are to go like is something in the lines of -- for the year ending '24 is [ 3.25p ] and this year is [ 5p ]. The dividend will be going in the same pattern, an increase from 2.3p to 2.4p per share. The cash position at the year end was GBP 4.33 million and you probably read it in the accounts. Since then, we have reflected one more Vigilant repayment at the end of September, so on Vigilant repayment schedule, which was three more quarters to collect until June '26. So on the next slide, it's more -- it's a divisional review. Croma Locksmiths, Croma Fire and Security broken down by revenue increase of 10%, 8%. We've adjusted the intercompany trading, which gives us a total uplift of 10%. EBITDA of Locksmiths an uplift to 12%, Fire and Security 11%. When we take into account central costs, there an uplift of 10%. I think this is a strong performance in the current [ covenants ] and we are trying various ways to improve margins. But what I can say for sure is we haven't lost those gross margins this year. Yes. Thank you everybody. I would like to give the call to...

Yes. Thank you. I think that's a very important point. I'm sure everyone is reaching about it in the end market and every other market for that matter. And we shouldn't underestimate the impact that we've all suffered with the national insurance changes in April. And whilst it only impacted us the 2 months of this particular reporting period, it is an ongoing challenge for all businesses as well as the dire market conditions. So whilst we have not particularly moved forward in leaps and bounds, I think it's a solid steady performance. So the outlook for '25, of course, we delivered on target. We've strengthened the management team and added 2 experienced Board members. We've got a strong pipeline of new store acquisitions, and we are, of course, in an excellent financial position with the cash resources to fund the rollout plan. We expect to see the compounding benefits of the acquisitions contributing to sales and profitability. And so far, we've had a good start to our current year.

So what I'd like to do now, we've given you some of the facts is go through the questions that I see on the screen here in front of me. So the first question I think I read that correctly, [ March Paye ]. In the CEO statement, you mentioned the possibility of using properties to fund future acquisition opportunities. Just to confirm this refers to a potential sale and leaseback arrangement, correct? That is a possibility, to answer the question, but no. Currently, we have our bankers who have confirmed that they stand ready to loan a high level of funding against the total book value of our properties, which I believe I'm sure it's in the accounts sit at GBP 3 million plus now. So we have a drawdown facility from our bank should we require it at a very conservative interest rate. Nevertheless, should we wish to sell and leaseback, that is always a future possibility. Next question, [ Stuart D ]. How does Croma's integrated Locksmiths and Fire and Security model set you apart in the U.K. market and support long-term growth? Very good question, Stuart. Most of our industry, which I usually explain on the first slide, is very much split into 2 areas. You have locksmiths on one hand and you have electronic security on the other hand. Croma does both together. Now locksmiths tend to have very different skill sets to those of electronic security engineers and the big players in the market, the ADT's, the Chubb's, all of the big names that are out there, Johnson Controls, Tyco, ADT's. They provide electronic security, and they tend to use subcontractors to do locksmithing work because they don't really understand how to cut holes in timber doors and put them together. But there is a bigger part to this point, which is really important. Because of the regulations of BS EN179 and 1125, which refer, I don't expect you to know those numbers, but they refer to fire escape doors in buildings. And for years, people are fitting the wrong hardware that is to be compliant with current regulations. Croma are experts in that field. So when we quote to fit access control systems, our locksmiths are able to match the correct hardware on those doors. This is becoming even more important under something some of you may have heard about, which is Martyn's Law and this refers to lockdown procedures in buildings. And again, you have to have the right electromechanical hardware on the doors. So Croma as a business is able to do both of those things in-house without having to coordinate subcontractors to deliver the answers or solutions, I should say, to our clients. Another question from, [ Ovais Martin ], sorry, it's my eyes. Is that [ Martin ]? Yes. How is progress on converting and improving results at the acquired locations, Meridian and Benn? The profitability based on the disclosures appear rather underwhelming even after adjusting for the real though purely accounting expenses related to provisions. Forgive me, I'm trying to read a long distance here. Teo, is this something you've got some answers for in terms of what [ Martin ] is asking us about the Benn and what's the other business?

Meridian and Benn. Yes. So Meridian, we acquired Meridian in the end of January. So we only had 5 months of trading. For Benn, we acquired on 1st of April. It's only -- we only had them for the last quarter. There was a disruption for Benn with planning merger with our existing Peterborough site, which is City Locks. And I think because we've acquired them in the second half of the year, it's very, very difficult to get an actual performance in that span. What I can say, however, because I think this would answer some of the questions I've seen on screen. I have looked on the slide where all the recent acquisitions. I have to look at the performance of the couple. I can say none of them are below target. But just as an example, Southern Stronghold that we've acquired in July '22, the turnover is up by 30% and the EBITDA achieved by the vendors at the time of 90,000 current EBITDA achieved is GBP 140,000 for this year ending '25. Our investment appraisal the predicted EBITDA was around GBP 120,000. I also looked into City Locks. City Locks prior to Benn, just City Locks itself, which we had separate until June, an uplift -- small uplift in turnover and increase of EBITDA. And again, that comes to GBP 20,000 extra EBITDA on our investment appraisal. Safecell, how we've projected Safecell is completely on track by turnover and EBITDA and Meridian and Benn I'm hoping that we will be able to report better at the 6 month investor meeting.

Thank you, Teo. Stuart, next question. With no debt and strong cash, how are you balancing acquisitions, property investment and dividends going forward? We've not really spent too much time thinking about our dividend policy going forward, but we are sticking to our incremental increase. There is an argument that one might say that raising it by 0.1 is an ever reducing percentage each year because, of course, the base number is increasing. And depending on where we go, maybe there is a case to be made to increase. But in terms of the cash, how are you balancing acquisitions and property. When we look at an investment for a locksmith business, securing the premises and investing in that property to make sure that a site that may have been operational for 3, 4, 5 decades is not lost because the local community that have been using that business, we certainly don't want to be in a lease where we are moved on within a short period of time. So we will continue to buy those properties that make sense to use them. And again, when we do our acquisition appraisal, we look at the turnover of the business, the savings we think we can make and the stickiness of all of their clients that they already have because that is something that will allow us to feel comfort in spending this hard cash on those businesses. So there isn't really a balancing of how much are we paying for the business versus the property. It's all about whether the entire deal structure makes sense to Croma. We're not overly concerned with the building of the property value because we always see it as a method of raising cash should the need arise. And I understand some investors wonder whether we're a property company or a security company. But for all the good reasons we've reiterated many times previously, we need to lock down those premises. And a good example of that, which I will mention now is that we had a lease coming to an end in one of the locations in Southampton and the landlord asked us to exit. Thankfully, it was only 1.5 miles from one of our other stores because, of course, we started in Southampton, and we were able to merge that store in with that -- with our principal premises in the Southampton area. So that's an example of how we can be [ ousted ] very quickly from a location where a reputation has been built over many, many years. So we will continue to try and purchase where possible. Moving on to [ Martin ] again. Are you confident that targeting a specific number of acquisitions by store count is the right approach? I think we've only thrown a number of 2, 3 to 5 stores out into our statements because we were being pushed to give a number. If we are able to make 2 very, very large acquisitions in the year and increase our turnover by 50% or 100%, why wouldn't we do it? By the same token, we could see that 5 plus more than 5. So I don't want that to be a limiting factor. It's really there as a guide and shouldn't really be followed. I think the objective of the exercise is to see us grow our business steadily and solidly and increase shareholder value with what we're doing. What if acquisition prices increase and only a few opportunities meet your 15% ROI? Again, very good question, [ Martin ]. But remember, I think you may have been here last year when we talked about the locksmiths trade in the U.K. There are no acquirers out there trying to buy them. There are too many qualifications and points of understanding. And therefore, the sellers do not have many options. And most of them have stayed operating a business far too long when they should have brought in investment or done something a little earlier. So the opportunities that we find, I don't see that those price levels are going to rise. We've managed to stick between a level of purchase price with most of them and almost all of them get it and understand it. So wouldn't a sole focus on returns-based metrics better align the strategy with shareholder value to focus on returns-based metrics. But if we're building this business to cover more parts of the U.K. and build out our network, we have to continue on the strategy that we've set out. And the increase in margin will come through acquiring those locksmiths with an ever-increasing turnover of our business, which allows us to have better buying prices and control of what's in the market. We're already seeing and continue to see manufacturers where they have a large end user and they don't have another locksmith with as many staff as we have to service the account. So they're more likely to point them in our direction. Now [ F. Wollian ] says, could you please provide like-for-like revenue for existing shops, please? Teo, help me with this answer. So could you please provide like-for-like revenue for existing shops?

I think the question is if we exclude Meridian and Benn. Organic growth was 5%. So out of the total 10%, 5% was [indiscernible] and 5%...

Okay. So that's the answer. Thank you. Next question, what price earnings ratio range is acceptable for acquisitions? We don't really look at it from that point of perspective, price earnings ratio. How do you feel is the right way to answer this question?

So we are looking at up to 3x adjusted EBITDA and obviously, the deal is structured from a cash-free basis.

Between 1 and 3. Closer to 1. The 3 is for much stronger businesses with some electronic input. So yes, I think that's how we work it. Anthony D., 2026 EPS is forecast to drop 22% Why? We have published this. We have talked about it. We are gearing up and increasing our team of management and that was put out in an RNS some time ago. And that is why we've a forecast to drop, but we have to remember that, that drop does not include any acquisitions that we do. So it's a very conservative view of the world based on the extra overheads that we are taking on to be ready to expand the business. Jeff J. You are increasing management headcount, which is what we've just said. How does the increase in overhead compare with the synergies achieved with acquired businesses? I'm not entirely sure what Jeff means. You are increasing management headcount, yes. How does the increase in overhead compare with the synergies achieved? I think what you're asking there, Jeff, is, of course, we've got savings when we make acquisitions, which will contribute towards those. And that is absolutely correct. However, those acquisitions are to happen, yet we have the costs today of increasing, and that is why we thought we would be cautious and put out a note that says we're expecting a drop. The reality of whether we see that drop is another matter. And if we are doing everything we say we're going to do, then time will tell if we sat here next year after this year's run past us very quickly, it will be interesting to see where our numbers sit at that point. How many of the converted properties above services [ F. Boyant ]. How many of the converted properties above the shops do you intend to rent? Do you think this would be distraction to the main focus of the business? No, not really because only a couple of -- or a handful, I should say, several are suitable for those purposes. Where we're trading from industrial estates, of course, there's no apartment or residential part to it. We currently have 2 rented out and a third one to convert. There may be a fourth in the future. And of course, depending on what acquisitions we make, maybe there's others. All we're doing is converting them and renting them out to create revenue in a space that is no longer used because most of those locksmiths when they operate in those businesses were running the upstairs as offices, and they don't need those offices. So the space has become dead. The principal area is the ground floor shop, which is where the trade is taking place, and therefore, we're just maximizing the asset by renting out the upstairs areas. Again, Jeff J. What are your priorities regarding management culture and incentives at the operating sites? Will this be more or less effective than the family-run structure? It's a very good question because what we try to do with all of those locksmiths businesses is to keep that [ family ] culture in those areas as their own unit. And all we're doing is adding layers of support, if you like, with our software and our buying power and our shared services and support for manpower as and when required. So the management culture is to try and keep it exactly as it is. The incentives is a very good one because Teo has worked very hard on a share incentive scheme, which has been brought together, but it's not -- it's work in progress, yes. because we want to encourage them to all feel as though they're part of this operation. Moving on to [ F. Boyant ]. In your statement, you've mentioned that there are savings based on consolidated purchasing. If that's the case, one would expect the EBITDA to be growing faster than the revenue, but that hasn't been the case for the last several trading updates and results. Why is this the case? We have to remember that the purchasing power that we have that brings -- allows us to buy at far better rates is only one aspect of it. We also, when we buy these businesses, have increased costs in IT, infrastructure, which those businesses did not have. So there is a bit of a balancing act. But of course, once you go past a certain point on the graph, the growth will start to look a little more exponential, which is what we're all looking for. So last question, Brian. Is there an optimal number of locksmiths based on geographic coverage and scale such as 50-60 or there is no target in mind in the medium term, 5 years? Again, a good question. We've seen it in years gone by. There are many, many more locksmiths available for us to purchase, and we have set no limit on the number. What is important for us is the long-term success of what we are building and we will -- if 5 or 10 in a year are available to purchase, we will do so. And I believe that, that number long term is fairly conservative, and there is room for many more.

The Board changes, do you want to say a few words on that?

Yes. Okay. So in terms of the Board, we had a question here about Board change. And the answer to the question lies in the fact that we had a very good -- 2 very good NEDs with Croma and we still have Steve until the AGM. We've now announced that we have located 2 more experienced NEDs for what we are doing. And at the time, the NEDs in position were very well placed to help us through with a huge wealth of experience that they had when we were divesting of Vigilant. And those NEDs did that job absolutely very, very well for us. But of course, now is the time to move on and think about the costs of our business and who is closer to hand and better suited to help us drive what we're doing for the future. Are there any other questions? I think that's all the questions. But thank you, everyone, for your future interest. I will hand back to Alex, if I may, please.

That's great. Roberto, Teo. Thank you very much indeed for addressing those questions from investors today. And of course, the company can review all questions submitted today, and we will publish those responses on the Investor Meet Company platform. But Roberto, before I redirect investors to provide you with their feedback, which is particularly important to the company, could I please ask you for a few closing comments?

Yes, of course, Alex, and thank you for hosting us today. Thank you for everyone that has joined to listen. I hope it wasn't too boring. What I would urge you to do is to please go back over the previous meeting investor sessions and all of the RNSs that are out in the market because our story is very strong, very consistent, very steady. But I'm hoping that we are going to have a very, very opportunistic time over the coming year. And thank you once more for joining us today.

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