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 financial results for the first quarter of 2020. [Operator Instructions] Let me now turn the floor over to your host, Mr. Maik Laske, Head of Investor Relations of FP Group.

Good morning, ladies and gentlemen, and a warm welcome again to everybody on the line. My name is Maik Laske, I'm the Head of M&A, Treasury and Investor Relations department at FP. I welcome you again to our conference call today concerning the publication of our results for the first quarter 2020. 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 you some more insight on FP's results in the first quarter 2020. At the end of the presentation, as usual, there will be a Q&A session. I will now give the floor to the CEO and CFO of FP, Rüdiger Andreas Günther.

Thanks, Maik. Good morning, ladies and gentlemen. This is Rüdiger Andreas Günther speaking. Welcome to our conference call today. It's just been 10 days that we updated you on our full year results for 2019. Since then, our finance team is working hard to conclude all our calculations for our results of the first quarter 2020 and to reply to your question on various calls. Some of your questions have not been answered [indiscernible], and they will do this in due course. You're also aware of the talk announcement that we published on Tuesday morning earlier this week. Since our first quarter results were much better than last year and since we risked that our results would positively exceed calculations by some market participants, we were obliged to go a talk and preannounce our results for the first quarter 2020. I believe that especially when you compare ourselves with our main competitors, you understand why we needed to do this. Market feedback with the share rising by almost 9% on a decent volume has proven us right that we're right to stick to market rules and go a talk. Press feedback also has been quite positive. So to keep a long story short, we are very satisfied with our revenue and EBITDA performance in the first quarter 2020, but still, ladies and gentlemen, remain cautious on the outlook for the full year 2020 as the still-ongoing corona situation provides some uncertainty in the current fragile economic market environment. We are taking your concerns about our communication very seriously. As you can see now, we report our EBITDA and revenue in an unadjusted -- in unadjusted terms. The first 3 months of the year, revenue rose by 9.4% to EUR 57 million. This is the best quarter, in revenue terms, ever FP was recording. Earnings before interest, taxes, depreciation and amortization rose significantly by 15.1% to EUR 8 million. As far as cash flow is concerned, in the first quarter, FP generated a neutral cash flow compared to EUR 2.9 million in the same period last year. Adjusted for investment and finance lease assets, M&A and payments for the ACT project JUMP, the FP Group achieved a free cash flow of EUR 2.8 million in the reporting period compared with EUR 7.4 million in the same period last year. Free cash flow was affected by a change in working capital due to the late payment of a key customer. As of balance sheet date, these receivables have now been collected in the first week of April. Furthermore, the planned buildup inventories during the quarter to ensure delivery capability also impacted the free cash flow. While both revenue and EBITDA provide for an appealing picture, we continue to focus on the cash flow generation of our business. Hence, the decline in the adjusted free cash flow doesn't come as a surprise to us. It is even understandable in the corona uncertainty where we focus strongly on our customers, but it also requires us to focus further on our working capital and cash flow management. Please follow me to the next page, Page 3. Ladies and gentlemen, let us take a closer look at the earnings and profitability situation in the first quarter. In the core business of Franking and Inserting, revenue increased by 7.1% to EUR 35.3 million. My colleague, Patrick, will explain you later which factors contributed to this revenue increase. Despite all the criticism, we are very happy that our Mail Service business is now delivering the long-awaited revenue increase and, even more importantly, that Mail Services is growing profitably now. We are not fully satisfied with the revenue development of the Software/Digital activities yet, but corona also takes its toll. In the first 3 months of 2020, the FP Group increased EBITDA by 15.1%. The EBITDA margin grew to 14% compared with 13.3%. Both the Franking business, but more importantly, the Mail Services segment added to this. As expected, the ACT project JUMP also delivered increasingly recurring positive saving effects. We expect to grow the recurring savings from JUMP from EUR 2.3 million in 2019 to EUR 4 million for the full year 2020. Depreciation and amortization fell slightly in the first quarter of 2020 to EUR 5.4 million compared with EUR 5.6 million in the previous year. EBIT doubled to EUR 2.6 million, and consolidated net income rose by 15.29% (sic) [ 52.9% ] to EUR 1.9 million. Let me repeat, consolidated net income grew by 52% to EUR 1.9 million. This corresponds to earnings per share of EUR 0.12 compared with EUR 0.08 in the first quarter of 2019. So all in all, a positive start into the year, but a lot of work ahead for the team. Please follow me to next page, 4. Despite a significant improvement in profitability, cash flow from operating activities reached just EUR 4.7 million compared with EUR 9.3 million in the previous year. It was burdened by the already explained temporary increase in working capital over the course of the year, mainly caused by an increase in trade receivables, EUR 4.3 million as of reporting date, and an increase in inventories compared with 31st of December 2019 to secure our supply chain in the current corona situation. In the first quarter of 2020, the FP Group invested EUR 4.8 million in future growth as part of the implementation of the ACT strategy. This includes the acquisition of the business operation of HEFTER Systemform in the amount of EUR 1.2 million. Investment in capitalized development cost declined in the first 3 months of 2020, mainly due to lower capitalization in connection with the ERP/CRM project. Free cash flow amounted to EUR 0 million in the first quarter of 2020; previous year, EUR 2.9 million. Adjusted for investment in finance lease assets, M&A and payments for the ACT project JUMP, the FP Group generated free cash flow of EUR 2.8 million compared with EUR 7.4 million. The change in cash flow from financing activities in the first quarter of 2020 in the amount of EUR 3.9 million is mainly due to proceeds from banks in the amount of EUR 4.7 million and payments to repay leasing liabilities in the amount of EUR 1 million. The FP's net debt increased slightly to 32 million -- EUR 32.2 million as of March 2020 compared to EUR 31.7 million at the end of 2019 financial year, while cash and cash equivalents rose to EUR 22 million at the end of the first quarter. In the current pandemic situation, FP is focusing, in particular, on securing and expanding existing group liquidity in order to secure the company's strategic and operational goals in the long term. Please follow me to Page 12, and this is an updated picture as lots of our big competitors also published yesterday evening. Ladies and gentlemen, you might have seen the results yesterday. I'm extremely happy that we now, for the 15th consecutive quarter, outperformed competition in the core Franking business. Again, the arrow shows into a complete opposite direction. We believe strongly in the A in our ACT strategy as a strong core business sets the foundation for our future growth. Success over such a long period cannot be an accident. I guess you agree. Ladies and gentlemen, I hand over to my colleague, Patrick, our CSO.

Thank you, Rüdiger. Good morning, ladies and gentlemen. Based on our regained momentum in the second half of 2019 as well as for the first quarter 2020, we are pleased with the performance in the core business. Sales contributions of EUR 0.7 million from the acquisition of HEFTER Systemform are included for the first time. The effect of the reassessment of the useful life of leased products in the previous year accounts for EUR 0.9 million and positive currency effects of EUR 0.3 million impacted the revenue. To spend some further words about our acquisition of HEFTER. The revenue contribution only accounts for a mere 6 weeks for the first quarter 2020, as we consolidated the company in mid-February. HEFTER enjoyed a 50-year long and highly reputable history in the insert and folding market as well as in the wider office equipment market, and provides also for strong customer relationships with third-party franking customers. We are also confident for the further rollout of our state-of-the-art PostBase Vision model range, which was now also introduced in France in Q1. And to inform you directly, yesterday, we received a positive approval by the Canadian Post Office, so we can now also start the rollout in Canada. Let us now have a look at the Mail Service business. The business includes services such as the collection, franking and consolidation of business mail. And as you're aware, Mail Service still accounts for about 1/3 of our total revenues. Mail Service has now, in Q1, completely reversed the negative trend as operational and strategic measures are taking effect. Hence, Mail Services grew by 19.3% compared to the first quarter of 2019. This is largely impacted by the postage increase by Deutsche Post AG introduced in summer 2019. But even more interesting, Mail Service has grown mail volume against the overall market trend. And even more importantly, Mail Services is now growing profitably again. We get spot constant customer feedback that our IT platform is superior to some of our competitors and that clients are willing to change to freesort. We will continue to work on this sector. So with this, let me now hand over to Sven.

Thanks, Patrick. Ladies and gentlemen, also from my side, a warm welcome. We reported for the first time a negative revenue trend in our Software/Digital activities. This is mainly driven by a decrease in our Hybrid Mail activities as compared to a very strong first quarter in 2019. Due to corona and the trend to digitalization, we see an increasing demand for FP Sign, but revenue is still on a low level. As mentioned last week, we were facing project delays for our IT business. As we are focusing on factory automation, energy management and infrastructure management, we were faced with lockdowns of factories and buildings. Like with any other company in the pandemic situation, customers kept business contacts at a minimum and reprioritize their investments. We remain confident on the business opportunities for our IoT activities and continue further on strengthening our sales efforts. Let's give you a short update on the corona situation on Page 9. This page is familiar from last week as we already presented it. Our view on the corona situation has not changed since last week. We see first return to office activities, both for FP, but more importantly also for our customers. We are making any effort to ensure that our business is impacted at a minimum. And we are focusing on maximizing liquidity and profitability of the group. You can be sure that we are working hard to implement the relevant countermeasures to reduce the corona impact to a minimum. Now back to Rüdiger.

Thank you, Sven. Ladies and gentlemen, the previous slides have again indicated that we delivered and that ACT is working. However, by lockdowns and diminishing across -- are diminishing across Europe, we remain cautious on our outlook for the year. Let me repeat, 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 on all our core KPIs. However, we are very optimistic that we will manage this challenge. The start into the new year, leaving corona out, was very promising. FP is on track. ACT remains. We will grow in 2020, and we will grow in the years to come. Now back to Maik and to the operator for your Q&A questions. Thank you.

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 we have the first question coming from Mr. Felix Ellmann from Warburg Research.

One question regarding the Mail Services business. In my opinion, this was always a problematic segment. And it turns out that a bit like a miracle that you -- what you presented in the Q1 for this segment. Could you elaborate a little bit more on whether we have to expect this to become a profit center in the future? Or what was the main actions you took for getting this into profitability, which for me is quite surprising?

Mr. Ellmann, this is Patricius de Gruyter. I'd like to answer this question. So indeed, we are happy that our measures now seem to pay off. And exactly, we are not only hoping, but we will generate profits for this year and, therefore, show the turnover of the company in Mail Services. As I said, this is one -- it's written, on the one hand, by the positive increase of Deutsche Post, but also by other operational measures which we introduced, such as our disciplined measures and by getting rid of unprofitable customers as well.

And the next question comes from Sy Schlueter from CAI Analyse.

It's Sy Schlueter. A question on the FP Sign. A little bit disappointing for us to see that there is, as you put it, no revenue contribution because I would have thought that this is a particular beneficiary of the corona situation or maybe you have already seen an improvement in Q2. Or what's at the core of this performance?

Well, we are still lagging behind our own plans. That's something which we also informed you about in the last call. We see some significant improvements in the leads now also in the corona situation by a much higher number than pre-corona. And we're implementing further marketing and sales measures to improve the level of design revenues, but we saw also a significant improvement as compared to 2019. Yes, we are disappointed that we have not reached the levels yet which we intended to reach.

The next question comes from Mr. [ Lars Wittan ] from Obotritia Capital.

Regarding the profitability, ACT, I would like to understand this a little bit more. For instance, in Q1 2019, you reported an adjusted EBITDA of EUR 7.4 million or an EBITDA margin of 14.5%. And in Q1, you had an EBITDA margin of 14% or an adjusted free cash flow of EUR 2.8 million compared with EUR 7.4 million. So that means, for me, despite higher revenues of EUR 5 million, the EBITDA margin is shrinking, and the free cash flow is around EUR 5 million lower compared to the previous year. Also, as I'm looking in the cost structure, for instance, the certain expenses in Q1 2020 are higher than in Q1 2017 or 2018 where you started with FP Fit with JUMP. And the same as if I'm looking in your segment reporting, here, for instance, the cost for essential functions are increasing year-by-year. Could you give us a little bit more color on that? And how are you calculating the cost savings of EUR 2.3 million or, let me say, for 2020 to EUR 4 million? For the Mail Service, how much is the post-sales impact compared to Q1 2019? And for the adjusted free cash flow, I have looked in the balance sheet. I can't see the big increase of working capital because the inventories are increased by EUR 800,000. This is the same, more or less, for the receivables. What you can see is an increase of the other liabilities in Q1 2019 by roughly EUR 5 million, but that has, in my view, nothing to do with that. Could you give us some more information? How do you mean this? And in this area, also, why do you use the financial liabilities by EUR 4.7 million? You have enough cash. Also excluding the [ tailor quarter ], which was restricted, can we expect -- or do we have to expect more in the line of 2020? For the outlook, I think the pre-corona guidance was a little bit [ tarnished ] because if I am going back then, was the revenue target for 2020, EUR 250 million, with an EBITDA margin of 17%? So if I make the math, then would be the EBITDA more than EUR 40 million? Or if I take your number with a revenue increase by 5% to 8%, the EBITDA would be increased to EUR 37 million to EUR 38 million? And my last question is regarding the AGM. What are the reasons to postpone the AGM? And what is the timing for the new AGM?

So Mr. [ Wittan ], like we already replied to some of your questions via e-mail prior to this call, some of the questions that you have raised now might not be answered right now. If you still feel that some of the questions are unreplied, we should speak after this call or in the course of next week. And so the management ask you for your kind understanding. Due to the short time frame between the publication of the full year results and also now the Q1 results, we've all been working -- we have all been very hard on delivering now the results. When it comes to the AGM, I will hand over to Rüdiger Günther.