Francotyp-Postalia Holding AG (FPH) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. And welcome to the Francotyp-Postalia Holding AG Conference Call Regarding the Financial Results for the Financial Year 2019. [Operator Instructions] Let me now turn the floor over to your host, Maik Laske.

Good morning, ladies and gentlemen. And a warm welcome to everybody on the line. My name is Maik Laske, I'm the Head of the M&A, Treasury and Investor Relations Department at FP. I welcome you to our conference call today concerning the presentation of our results for the full year 2019. Here with me today are Rüdiger Andreas Günther, our CEO and CFO; as well as his colleagues, Patricius de Gruyter, our CSO; and Sven Meise, our CDO and COO. On behalf of us all, I would like to thank you for taking the time to be with us today and for participating in the call. The management will now give some more insights on FP's result in the full year 2019. At the end of the presentation, there will be a Q&A session. I will now give the floor to the CEO and CFO of FP, Rüdiger Andreas Günther.

Thank you, Maik. Good morning, ladies and gentlemen. This is Rüdiger Andreas Günther speaking. I would also like to welcome you at our conference call today. Earlier this morning, we have published our results for the full year 2019 as well as our annual report. We are very curious to get to know your response. Like many other companies, the preparation process had been impacted by the corona situation. But as you have already seen or you will see now, we have confirmed our preliminary figures that we published on 3rd of April 2020. Our new annual report is labeled responsibility. We as the FP team, my colleagues, we as a Board, we assume full responsibility for the results. We as the management team at FP had been under severe attacks since earlier this year. As to the ability of our ACT strategy to deliver results, the 2019 results provide a different picture. To start in 2019, we have achieved or even exceeded all our core KPIs. We jointly have delivered the best results ever. FP has never recognized a higher revenue and EBITDA in its history. However, we take investors' concerns seriously, and we constantly review our objectives and strategy. Despite the strong results, the question remains, are we satisfied? Well, our organization has worked hard to deliver on ACT and JUMP. But of course, we can always improve. And we are striving very hard for it. Now let me give you a brief overview what have we, the management team of FP and FP's global workforce achieved in 2019. Well, not everything went according to the plan. Revenue should have been higher, but the Mail Services business suffered an unexpected decrease which we were unable to fully offset with other business areas. Also, we would have liked to expand our business model with experienced acquisitions, but there was a lack of suitable targets for an appropriate purchase price. And our share price trend was still unsatisfactory. But nevertheless, ladies and gentlemen, yes, maybe revenue should have been higher, but looking at all performance key indicators, 2019 was a really successful year, with Digital business up even 13.8%. We have increased our market share in our core business, Franking, for the past 14 quarters. Nobody would have thought this before. Now we have exceeded a market share of 12%. Never in our history have we launched so many new products in the space of a year: digital, hybrid and traditional products. And the share price started around EUR 3 in January and ended in December at EUR 3.45. It's 50% -- 15% higher than at the start of the year. Still unsatisfactory, but our share performed much better than those of our competitors, demonstrating the market's confidence in our performance. So Patrick, how do you see 2019 in your area of responsibility?

Thank you, Rüdiger. Ladies and gentlemen, also a warm welcome from myself. We, the FP management team stand together, are satisfied with 2019. Nevertheless, also from my side, the question remains whether we have achieved each and everything we wanted to achieve. Let me recapitulate, not everything worked out well. Amongst other things, our cross- and upselling strategy in FP Sign fails to bring the desired success. And our decentralized marketing approach for FP Sign turned out to be warm. But nevertheless, the launch of the PostBase Vision, first in the U.S., was a success. Now overall, which means including new PostBase Vision, we now have an installed base of over 70,000 franking systems in country. In France, meanwhile, we have grown to nearly 9,000 units. In our core business, our market share in France has grown by 1.3% to over 5%; in the U.S., by 0.5% to 8%; and in Austria, by as much as 6.5% to 53%. We observed first positive signs in key account sales for FP Sign in Germany. For example, we acquired some high-profile customers such as Würth and international telecommunications company, the Stadtwerke Troisdorf municipal utilities, American Towers and Raisin Bank. So now I'm handing over to you, Sven. How's the situation in your area?

Thanks, Patrick, and a warm welcome from my side. Like my colleagues, all the critical review on 2019. In general, we have certainly aimed for an early introduction of some of our digital services. But to be more specific, amongst other things, bottlenecks affecting internal and external resources forced us to delay the U.S. launch of FP Parcel Shipping and modifications and new features for FP Sign back to early 2020. Additionally, our stake in Juconn has not yet brought the level of revenue we expect within our plan. But nevertheless, with the successful integration of Tixi in 2019, we now provide a comprehensive overhauled product portfolio for IoT security business. We have improved the perception of FP in the major IoT markets, energy, automation and infrastructure. And JUMP has been fully accepted by the organization. We have realized savings of more than EUR 2.3 million, while a one-time cost were in the same amount. The project will continue to focus on improving quality, speed and efficiency and ensuring the midterm savings of minimum EUR 6 million per year. With these self-critical reviews from our management, I'm handing back to Rüdiger.

Thanks, Sven. Yes, admittedly, we adopted our revenue forecast for 2019 back in August 2019. We're on Page 5. We are pleased to inform you now that we have been able to achieve our revenue forecast. We are even more proud that we significantly exceeded our EBITDA and free cash flow forecast, delivering the best figures for FP ever. This shows ACT is right. ACT, ladies and gentlemen, is working. ACT is delivering. Finally, we achieved a revenue of EUR 2.91 million (sic) [ EUR 209.1 million ] in fiscal year 2019. This is 2.4% higher than in the previous year. The reported revenue benefited from a positive currency effect of EUR 2.6 million on the basis of a constant exchange rate, revenues reached EUR 206.5 million. But what really satisfies us is the development of the EBITDA. The EUR 33.3 million, we exceeded our initial EBITDA forecast and increased the reported EBITDA 2018 by almost 93%. It includes scheduled extraordinary expenses for the ACT project JUMP in the amount of EUR 2.3 million. In the course of the further implementation of the project, recurring savings of the same amount were achieved in fiscal year 2019. Adjusted for exchange rates effect and the expenses of JUMP, EBITDA increased also by 36.5% to EUR 34.6 million. The positive currency effect amounted to EUR 2.6 million in revenues and EUR 1 million in EBITDA. The third KPI, the adjusted free cash flow achieved EUR 12.4 million, an increase of almost 40% -- 14% compared to 2018. Ladies and gentlemen, while we had a mixed start into the year 2019, which definitely did not please us at all and which led to the adoption of our revenue forecast in August, and please allow me to repeat, it was not an adoption to the revenue, it was an adoption up to the revenue, and it was not a profit one. We are now happy with all the efforts the organization has taken in the second half, and it was a tough uphill battle. And all this happened, ladies and gentlemen, while the company is in full transformation, both organizational via JUMP but also from a business model perspective. We are developing new products and digital solutions while still relying on the strong benefit from our traditional Franking business. We're adjusting our organization for more effectiveness and lean processes while establishing service centers in Europe and the U.S. and reducing management level through all. We are also introducing an ERP system. And you know this can be an [ exciting ] experience for some companies. And we are transforming all our companies not only to sell digital products but also in itself to become digital. Quite an experience for a company which is nearly 100 years old now. Let's switch over to the next page, please, and let's have a closer look at the earnings situation in 2019. As usual, there were several positive and negative effects, and I would like to highlight some of the factors that particularly influenced the figures. The profitable growth is again based on the success of the core business of Franking and Inserting, as already explained, in 2019, changes in currency exchange rate and the positive impact on revenue and EBITDA. The ACT project JUMP delivered a Wash as promised. For the first time, the extraordinary expenses for the project and the earnings leveled out. We expect the recurring savings to be minimum EUR 6 million per year from 2022. As reported during the year, the first-time adoption of IFRS 16 had a positive impact of EBITDA of EUR 3.7 million in 2019. At the same time, the depreciation increased by the same amount. This is an effect you are already familiar with. The effect of the reassessment of the economic useful life of leased products or lessor accounting purposes had a positive impact of EUR 3.1 million on revenues in 2019 and a positive effect of EUR 2.5 million on EBITDA. All in all, EBITDA, as reported as well as adjusted by currency effect and JUMP expenses, improved significantly. We did not only meet our guidance, but we also exceeded it. The strong increase in amortization and depreciation resulted mainly from 3 items. First, IFRS 16, as mentioned before, contributed an increase of EUR 3.7 million. In addition to that, we recognized an impairment of EUR 5.9 million on the goodwill of freesort as the company again failed to meet its operational targets and despite the further reorganization measures introduced in the coming year -- in the year. And finally, the first product version of FP Sign dating back to 2017 was also subject to an impairment in the amount of EUR 2.7 million because it did not meet the market's requirements and revenue targets. While these developments did not please us, it led to a further cleaning up of our balance sheet. The reverse positive recurring effect of EUR 3.1 million came from the reassessment of the useful life of leased products. Consolidated net income improved by 85% in fiscal year 2019. However, due to the negative one-off effect, including the impairment of Juconn, net income and EPS, respectively, for 2019 are again low in comparative items -- terms. The SEC encouraged us to further implement and accelerate the ACT strategy. Please follow me on Page 7. Despite high payments as part of the ACT strategy, free cash flow for 2019 was again positive. Here also several factors led to an adjusted free cash flow better than originally expected. Cash flow from operating activities developed very well. While we had a positive one-off effect from tax proceeds in the prior year of around EUR 6 million, we almost reached the same level in 2019. Looking at the increase in the payment of -- for JUMP of EUR 3.8 million compared to EUR 1.4 million the year before, this is a very positive indication that our core business is generating strong cash flow. In 2019, we again saw strong investment activities. They reached the same level as the year before. In connection with the implementation of the ACT strategy, we again slightly increased investment in new products. The investment in the capitalization of development costs totaling EUR 13.9 million also include investments of EUR 5.5 million in the global introduction of uniform ERP/CRM landscape, which I just mentioned. In 2019, FP also invested EUR 1 million in the acquisition of 15% of the shares in Juconn GmbH and, thus, further expand its offering in the IoT sector. All in all, the positive free cash flow in the amount of EUR 1.7 million was slightly below previous year. Effect, the adjusted free cash flow even improved compared to the already very good figure in 2018 and exceeded our guidance. Our cash and cash equivalents of more than EUR 18 million and our largely unused credit facilities provide sufficient leeway to cope with the current pandemic situation and steer the company through this rough times, successfully continuing and implementing our strategy. Please follow me to Page 8. Before we come to the explanation of the operational business development in 2019 with my colleagues, I would like to inform you about a restatement as of January 1, 2018, and the framework of the consolidated financial statements for 2019. As part of the ACT project JUMP and the preparation of the 2019 consolidated financial statements, we performed a group-wide analysis of existing pension plans. As a result, a pension plan in the Netherlands, initially identified as defined contribution, had to be restated as defined benefit plan. As the pension plan has already been in place since the year 2000, the restatement is recognized in the 2019 consolidated financial statements as of the start of the comparative period on January 1, 2018. As you can see in the overview, the effect of the first-time recognition of pension provisions on the equity amounts to EUR 2 million as of 2018. As a result of the continuing development, an actuarial valuations effect on equity as of December 31, 2019, amounts to minus EUR 2.3 million. Compared with the published preliminary figures, EBITDA for the fiscal year 2019 increased, therefore, by EUR 0.3 million as a result of the restatement. We are convinced that this is a strong confirmation of our belief that the local markets should cater to the needs of their customers and administrative work should be dealt, however, by expert in central centers of excellence. Thus, the ACT Project JUMP not only increases the power for the ACT strategy but also eliminates historically established organizational risks. Let's follow me to my favorite page on Page 9. Let me shortly comment on our core business. I think the picture is speaking for itself. The traditional Franking business is the backbone for the FP Group, a lot of times by media but sometimes also by investors not appreciate. It generates the strong recurring revenues base that we need to successfully expand and develop our new software and digital service and product lines. This is exactly the ACT strategy. Whereas our competitors are confronted with an ongoing downward trend, we continue to successfully attack in our core markets alongside our ACT strategy. We have increased revenue in the core markets for 14 consecutive quarters, and now also did so in the full year 2019. So with this, I'd like to hand over to my colleague, Patricius de Gruyter, our CSO. Patrick, the floor is yours.

Thank you, Rüdiger. Based on our regained momentum in the third quarter 2019, we are pleased with the performance in the core business Franking in the second half of 2019, leading to an overall full year increase in revenues by 5.6%. This is also the result of various strategic and operational sales measures that we've initiated and implemented. And we had mentioned at earlier occasions the recently launched PostBase Vision is expected to be the future growth factor in our Franking business. PostBase Vision has been introduced in the U.S., U.K. and Germany in 2019 as well as in France in early 2020. Also, the new postal tariffs introduced in summer 2019 in Germany led to a strong increase in service fees as we were able to charge our franking machine customers for the new rate tables. All in all, we generated EUR 134 million for the full year in revenues in 2019. However, to be precise and as already mentioned by Rüdiger, parts of this revenue growth were originated by the impact of the reassessment of the economic useful life of leased products. However, taking into account this positive effect, the currency-adjusted net growth of our core business in 2019 is still at 1.3%. Based on all the efforts of our ACT strategy, we have again been able to increase our market share for all core markets worldwide. We've done so since the rollout of our ACT strategy in 2016 in every consecutive year and also for the full year 2019. Our ACT strategy is on course. The attack is more -- the attack in our core business is of our utmost importance to our business model. The Franking business continuously generates strong recurring revenues and cash flows, and we can invest in our Digital business areas to build a solid foundation for our future success. Our global market share now stands at 12%. FP is the #1 in Germany and Austria and #3 worldwide. With our PostBase Vision, we are now also the #1 in technology and service. Let us now take the look at the Mail Services segment. This segment includes services such as the collection, franking and consolidation of mails of the business. Mail Services still account for about 1/3 of our total revenues. As we already pointed out in our last conference call, Mail Services is continuously facing a general decrease in mail volumes. Furthermore, it's also still impacted by our strategic decision to waive some long foregone revenue and to set a clear focus on profitability. While the revenue development in 2019 is still not satisfying, the decline is slowing down. For the first 9 months in 2019, we reported a decline of 13%. This trend diminished. In the last quarter, we managed to catch up and reach previous year levels. Overall, we saw a decrease in revenue of 7% to EUR 57.4 million. Throughout the year, we saw positive effects and the slight improvement in margins from the postage tariff increase by the German Post back in July and an increase in relevant discounts for our business. As our competitor Postcon has been sold to Quantum, we have watched and analyzed the market and recent developments very closely and are further improving our organizational setup and our products. Throughout this process and also based on our customer feedback, we got confirmation that our IT platform is superior to some of our competitors. Based on this, we benefit from clients willing to change to freesort but also intensified our sales activities. Before handing over to Sven, who will guide you through the IoT and JUMP, let me quickly elaborate on the Hybrid Mail Services and FP Sign, which fall under my responsibility. Hybrid Mail Services, which is handling analog mail into digital and vice versa to our subsidiary IAB, showed some growth in its core areas, input and output management. Furthermore, we have increased our sales activities here, too. With regard to FP Sign, we still cannot be satisfied. We decided to allocate further R&D resources to the development of our PostBase Vision. These resources were lacking for other product developments especially FP Sign. The decision has slowed down the development of additional features for FP Sign, which we considered important to a full market launch. As a result, sales and marketing activities were slowed down in the international rollout in combination with initially missing product specifications resulting in a strong deviation from business plan with the effect of impairment of capitalized development cost. However, we gained some pace in the second half of 2019, and we were able to generate contracts with some landmark customers such as Würth and American Towers with our key account sales force. I would now like to turn back to Sven.

Thank you, Patrick. In the IT business, our high security gateways are now being offered and marketed under one strong brand. This is meant by the successful integration of the Tixi operation, which we acquired in 2018. We have further overhauled our product offering and have fine-tuned our industry focus on the 3 core markets: infrastructure, factory automation and energy. This was accompanied by an intensified marketing campaign for our IoT activities to improve FP's brand recognition in the relevant IoT markets. With renowned customers on board, a broader product portfolio as well as new distribution channels, we do see furthermore momentum ahead. From previous calls, you are also very familiar with the JUMP project and our new implemented target operating model. So what have we achieved so far? We have successfully opened our Shared Service Center Europe in Hennigsdorf, close to Berlin. We have transferred first administrative process functions from our Italian, Belgium and Dutch subsidiaries to Germany and hereby improving our performance. We have realized the long-awaited Wash, meaning the investments into JUMP in 2019 have been leveled out, generating recurring savings in the similar amount for the first time. As mentioned to you during the second half 2019, we overloaded our organization due to high -- the high number of parallel projects in some areas and, therefore, decided to delay the global implementation of our common global ERP/CRM platform to the end of 2021. With the progress we made on JUMP in 2019, we are now confident to deliver minimum EUR 6 million of recurring savings 2022 onwards while having streamlined and optimized the group at the same time. So with this, I would like to hand back to Patrick, who is heading our corona task force.

Thank you, Sven. On the following page, we'd like to update you on our handling the current corona situation. Employee and customer safety comes first, followed by our business continuity effort in order to safeguard our business model against such external shocks. All our corona-related efforts center around safeguarding liquidity and maintaining profitability. Nobody knows what the final outcome or duration of the corona crisis will be, but we are adapting accordingly. Almost 80% of our staff is working from home right now. And when I say working, I mean it that way. They continue to call on our customers and provide remote services wherever feasible. Our IT department has done a superb job over the recent weeks, ensuring both that our franking machines continue to work with our service in Germany but also enabling our workforce to work without any disruption from home. To secure liquidity, we have initiated strong measures such as hiring freezes, short-time work and so on. We are running significant expense and CapEx reductions right now without harming the company overall. We are constantly reviewing the impact both on the business side, such as order intake, calling frequency and constantly run scenario analyses. Our lending banks appreciated the transparency and ongoing dialogue which we maintain with them, leading to a comfortable liquidity position which will help us to sail safely in this storm. We are confident that we might even benefit from the current trend towards digitalization. At the same time, we are well prepared to the topic with [ restrictions ] are further reduced and the economy will recover. We monitor developments on a biweekly basis, and we can withdraw all measures at short notice. It goes without speaking that we will ensure the safety for our employees and customers. Now back to Rüdiger.

Thanks, Patricius. Ladies and gentlemen, rough times. Please follow me on Page 17. The previous slides have indicated that we delivered and that ACT is working. However, the corona crisis currently provides uncertainty on the business outcome in 2020. While we initially planned for a revenue increase of 5% to 8% for the group and an EBITDA in the range of EUR 30 million to EUR 34 million, we are now forecasting significant declines in all our core KPIs. However, we are very optimistic that we will manage also this challenge. FP is on track. ACT remains. We will grow in 2019, and we will grow in the years to come. Now back to Maik and the operator. The team is ready for your Q&A questions.

Thank you, Rüdiger. Thank you, gentlemen. Ladies and gentlemen, now I'd like to hand back to the operator for the Q&A session.

[Operator Instructions] And the first question comes from Felix Ellmann.

Congratulations on the good numbers. They were slightly better than preliminary numbers, which was quite good. Could you give some more light on what a decline means in terms of revenue and EBIT for -- within the corona times we have right now within the year 2020 and onwards? And did you implement some changes in your strategy due to corona, meaning stopping business activities or making some things faster than they have been without corona? Just give some light on this, please.

Thank you. Mr. Rothenaicher. Rüdiger Günther speaking. I'll take your first question.

Ellmann.

Ellmann.

Ellmann?

Ellmann, yes.

Excuse me, it was Mr. Ellmann. Well, we have to evaluate. It's really only the first months of corona, and we have a mixed picture. There are some countries where we have a small deviation. There are other countries where we have totally set down. For the time being, I'm pleased with all respects of this insecurity with all the first months, I would say, 10% and more, 10% and a little bit more, that's what we expect currently. Patrick, would you take the other question -- Mr. Ellmann?

Yes. Yes, I heard it. And I'm curious for the second question.

On the second question, of course, now as corona [ effects ] now for almost 3 months, and we are looking into the effects also in the midterm and long-term base, which is too early to indicate right now, we have not changed our strategy on that. We expect, however, that digitalization will speed up. And then we will have to discuss this in due course with the Board, I would say, once we can see when economies recover over summer or autumn on how we will maybe change our strategy as well.

The next question comes from Peter Rothenaicher.

Firstly, on your first view on 2020, can you perhaps give some details how is business performing in the various business segments? So do you see currently the biggest negative impact on the sale of new franking machines? Or how is then the mail sorting business developing? Yes.

Yes. Looking in the first quarter of this year, we see some effects also from corona. In the first quarter, this will be slightly negative but only to a short amount as April was the 2 months where corona had its impact.

And how did freesort develop in comparison to the new franking machine business?

Well, in March, those effects were only slightly. And I would say they're increasing -- the decline is increasing as of April. But this goes in line also with the entire market in the mail volume.

Okay. Then with regard to FP Sign, you mentioned that you have achieved some progress also in partnership, I think, also with Deutsche Telekom and so on. Can you perhaps give us here some information what can we expect here for 2020?

Well, for 2020, we expect that we will speed up especially in the sales with our key account sales force of Mentana. As mentioned, we were able to close a number of deals with the customers. And concerning the cross- and upsell activities and other FP Sign, we changed our marketing strategy from a decentral to a central approach. And we will now focus on 3 -- our 3 main countries: U.S., U.K. and Germany, and level this out over the course of this year. And we will expect some increases, of course, compared to 2019.

Okay. And from today's point of view, when do you expect FP Sign to become profitable?

Certainly, the year 2020 will be still a year of investment for marketing and sales cost, of course. So this year, we wouldn't see a profitability on FP Sign. It would be expected as of year 2022 as a general view.

Okay. Then coming to the IoT business, here, you also mentioned some progress in your customer relationships. And with that, what can we here expect for 2020? So the volume is still at a relatively low level. Can you give us here some more indications about growth potentials in the current year and 2021?

Sven Meise speaking, Mr. Rothenaicher. The -- what we mentioned also in the corona chart is that we -- what we see in the IoT business doesn't fit to our plan due to corona because, as you know, we are really focused on decentral IoT business cases, so where we have installed basis, decentral installed basis. So what we experienced especially in April and May was that we couldn't get access to the buildings due to the lockdown, so we see delays in projects. We still have an interesting pipeline, but it depends a little bit on the general situation in the economy, and it depends still on the lockdown part. We have now experienced that some customers are back in business and where that we can even access -- when you look at the segment of district heating, where we are acting, that we can now access again buildings. But it's still a little bit wait to see how it's developing. We had a quite ambitious plan for this year, but corona is, yes, making some trouble in this area. And as we announced, we have this partnership with Telekom. But although in this area, we have to see how is the investment situation and our customer base, are they now open to invest, or do they probably do similar things like we saving liquidity and reducing the investments. That's where we will still have some questions marked or marks, but we are working on these kind of partnerships like with Telekom and others to have a broader sales approach here.