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

Good morning, ladies and gentlemen, and welcome to the Francotyp-Postalia Holding AG's conference call regarding financial preliminary results for the first half year 2020. [Operator Instructions] Let me turn the floor over to your host, Maik Laske, Head of Investor Relations of FP Group. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and a warm welcome again to everybody on the line. My name, as you know, is Maik Laske, and is the Head of the M&A, Treasury and Investor Relations department at FP. I welcome you again to our conference call today concerning the publication of our preliminary results for the second quarter and the first half of the fiscal year 2020. Due to the adverse effects of the COVID-19 pandemic, the full half year financial report will be published in 2 weeks on September 10, 2020. Here with me today are Rüdiger Andreas Günther, our CEO and CFO; as well as his colleagues, Carsten Lind, our new member of the Management Board; 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 insights in -- on FP's preliminary results in the first 6 months of 2020. At the end of the presentation, there will be, as usual, a Q&A session. I will now give the floor to the CEO and CFO of FP, Rüdiger Andreas Günther.

Good morning, ladies and gentlemen, from Berlin. This is Rüdiger Günther speaking. I would also like to welcome you to our conference call today. First half 2020 was quite challenging time, not only for FP, also mailing and digital communication market in general, but of course, also for the economy. I will come to the competitive situation a bit later. COVID-19, SARS, corona, however you name it, has shaken the global economy like always -- almost nothing before. All service, all economists state that the final effects from corona might last longer than initially expected. But ladies and gentlemen, we also know that the robust business model is a significant part of recurring revenues, a prudent liquidity management and the common vision to further develop a company from a solid ground are probably the ingredients for future success. Well, our FP did not remain unaffected from COVID-19. The global installed base decreased by approximately 3% by end of 2019 with Germany, Austria, but also U.S. and Canada holding against this trend. The e-signature market is growing, but admittedly, we did not benefit from this trend yet enough. IoT remains the megatrend. Hence, we are reviewing our growth and value proposition in this area to identify opportunities for improvement, for better customer service and for targeting the right solution. JUMP, our reengineering project, continues to deliver according to promises. As far as our promises to the project, we are delivering according to what we said and what we promised. Please follow me to Slide 3. Let us turn for the results for the first half 2020. As said earlier, we felt the impact from corona in April and May. June was slightly picking up based on the strong first quarter where we recorded an EBITDA improvement by over 15% and top line increase of 9.4%. Looking back at Q2 performance, we deliver -- we believe we delivered some robust numbers. The revenue increased by 0.7%, and the EBITDA even increased by 11.7%. The adjusted cash flow is significantly higher than for the first half 2019. But we expect this trend to level out throughout the year. We believe that this number probably sets the basis for some optimistic expectations, but ladies and gentlemen, we remain cautious. We've taken a lot of measures to contain profitability and liquidity within the group. Nobody knows whether there will be a second wave. But we believe that we, with our robust business model and the high level of recurring revenues, we aim not lose too much ground compared to the previous year. So to keep a long story short, we are satisfied with our EBITDA performance in the first half 2020, and we are happy to have a slight increase in these difficult times and turnover. Again, we still remain cautious on the outlook for the full year 2020 as the still ongoing corona situation provides still high uncertainty in the current fragile economic market environment for which, of course, our customers are also affected. But we are coming to this a bit later. Please follow me to Slide 4. Corona and COVID-19 had a significant impact in the second quarter, mostly on revenues. While home office became the new normal at many -- for many of our customers and contact restriction made it difficult to follow up on projects that need personal consulting and contact, we experienced a significant decline in revenue. But at the same time, we managed to secure profitability and liquidity and even achieved an increase in our absolute EBITDA numbers. The measures we had taken were successful. Page 5. Gentlemen -- ladies and gentlemen, excuse me, let us take a closer look at the revenue and profitability situation in the first 6 months of 2020. Compared with the previous year, revenues was almost stable, with a small increase, as I said, 0.7%. We were almost able to reduce the corona effect in the upper single-digit million euro range. The tariff increase by Deutsche Post AG last year contributed an additional roughly EUR 3 million in the Mail Service business, and the acquisition of HEFTER in February of this year also made a positive contribution of EUR 0.7 million (sic) [ EUR 1.7 million ]. The reassessment of the economic life of leased products to follow -- a follow-up effect from last year added another EUR 1.6 million. These were the major measures and effects that helped to achieve top line that was comparable to last year despite the corona crisis. On the earnings side, we were even able to expand our profitability, higher and recurring savings from JUMP contributed as well as COVID-19 countermeasures that were introduced during Q2. EBITDA came in at EUR 13.1 million, which represents an increase of 11.7% in corona times, a good success. The EBITDA margin thus climbed from 11.9% last year to 13.1% this year. And this impact continues right down to the bottom line where we were able to almost triple the EPS from last year. We will come to details of the business areas in just a few seconds with my colleagues. To summarize, we can say that the 3 areas each show a very different picture in the first half year 2020. The Franking Business noticeably felt the corona effect. The Mail Service business did quite well despite corona. And the Software/Digital business came in very weak, which, of course, as you all know, is a big disappointment to all of us. Nevertheless, all in all, ACT sets the right long-term strategic course, but still a lot of work ahead of us, not only looking at the current difficult environment. Slide 6. This is probably the most important slide. We should look at, in these times, cash and liquidity. They are key to whether a company will navigate through the crisis successfully and emerge out, if even stronger, because competition is hit. We are not dependent on government aids. That's a positive sign. Our figures show a very healthy stability as the potential to return to our growth strategy once business procedures return to normal. Cash flow from operating activities benefit from the higher profitability, on the other hand. On the other hand, cash flow also was supported by a number of measures we had taken to control costs and secure liquidity. EUR 4 million higher operating cash flow and EUR 3 million lower investments, mainly due to lower spending for capitalized intangible assets in connection with the ERP/CRM project, led to a strong increase in free cash flow. After a negative EUR 1.3 million last year, we now achieved EUR 5.9 million. Adjusted for investment in finance lease assets, M&A and payments for the ACT project JUMP, the FP Group generated an adjusted free cash flow of EUR 9.9 million compared with EUR 4 million last year. The strong cash flow generation was used for a reduction of financial liabilities by EUR 2.5 million. The cash on hand rose by EUR 2.2 million to EUR 19.8 million. I think these are numbers we can be a little bit proud of in these times. As a consequence of a strong cash flow, the FP Group's net debt decreased from EUR 30.17 million at the end of 2019 to EUR 20.6 million at the mid of this year. Our target in the last month was to focus, in particular, on securing and expanding existing group liquidity in order to secure the company's strategic and operational goals in the long term. We will continue to safeguard these targets ongoing. Ladies and gentlemen, follow me to Page #7. You know this chart, always one of my favorites, some of you follow our competitors as well. While we admittedly lost a bit of top line revenues, but we did not lose ground in our core business. So I'm happy that now for the 16th consecutive quarter, we outperformed competition in our core Franking Business. The numbers and the slide speaks for itself. Again, the arrow shows into a complete opposite direction. We believe strongly in the aid of our ACT strategy as the strong core business sets the foundation for our future growth. So with this impression, I'd like to hand over to my colleague, Patricius, our CSO. Thank you.

Thank you, Rüdiger. Thank you for this overview. Good morning, ladies and gentlemen. As you know, we are putting emphasis on the fact that FP has a large part of recurring revenues. This provides a strong basis for difficult times and the kind of environment that we have seen during the last month, but all 3 business areas have been affected to a different degree by corona, as you will see. The Franking business, which represents roughly 2/3 of total revenue, was hit hard, especially during the second quarter of 2020. Here, we saw a decline of 15.5% in equipment sales. After the first 6 months, the decline was 2.6%. Extraordinary changes in the way people work has even put pressure on the sale of consumables and finance lease agreements. But I'm quite sure you'll agree, the decline of 2.6% is relatively mild compared to other participants in the market. Why is that? First, of course, our acquisition of HEFTER contributed to revenue a total of EUR 1.7 million since the first-time consolidation in February. Second, our product range is superior to that of our competitors. The PostBase Vision has now also been introduced to the French market, and Sweden and Austria are to follow in due course. This machine is a large success and will give us tailwind when business returns back to normal, which, by the way, we expect for no earlier than Q4, and this goes without a second wave of infections and additional countermeasures and lockdowns. Well, there's not to say a lot about this chart. With our modern model range and with our focus on the cash-generating Franking business, we continue not only to outperform our competitors in revenue trends, but also again in market share. We have increased our market share now to above 12.4%. We are constantly growing in our strategic markets, especially France and the U.S., as laid out in our strategy back in 2019 -- 2016. Let us now take a look at the Mail Service business. This business includes services such as the collection, franking and consolidation of business mail. Mail Service still accounts for almost 1/3 of our total revenues. Mail Service has also been affected by corona, but to a lesser degree. After a very successful start into the year, we now still have a growth of 11.8% after 6 months of fiscal year 2020. The reorganization continues to deliver results. While the volume of processed letters was still lower, especially in Q2, we continued to benefit from the tariff increase of Deutsche Post AG in 2019. As you probably will remember, we strategically focused on profitable business, which in past reports led to lower revenues. Now we can see that this business is not only back on the growth track, but delivers a positive contribution to profitability. In fact, the difference between last year and this year is a full EUR 1 million on EBITDA level. While speaking to potential customers, we constantly get the 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, Patricius. Good morning, ladies and gentlemen. The first half of 2020 and especially Q2 is disappointing when we look at our Software/Digital business. Hybrid Mail reported a decline in business by 7.9%, partly also related to corona. FP Sign made no significant revenue contribution, while, on the other hand, we see a positive development in the sales pipeline, including a good development in the conversion rates. The IoT venture was hit hard by corona because these kind of projects involve a lot of customer interaction for consulting, deployment and so on. Due to the fact that factories, office and other facilities were closed, it was impossible to follow up on these projects in the planned time frame, and deployments were postponed by our customers, although the unclear impact of corona led to reluctance in investments by our customers. To summarize, we are not happy with this development. Still, we see the excellent growth prospectives in these markets. And we are working on interesting opportunities in the different areas. To improve, we, therefore, decided to put this business under strategic review, both in terms of the growth and value proposition, to define the appropriate target operating model for this business. The results of this review should be expected before year-end. A short update on our corona situation and countermeasures before I hand over to Rüdiger again. In April, May and June, we had sent up to 30% of our staff in short-time work, and we are still using this instrument in some business units as an important countermeasure to secure the skills and resources, on the one hand side, and on the other hand, to reduce cost and secure liquidity. Please let me take this -- the opportunity to thank our employees, works councils and unions for the support in these hard times. We all know that sending people home for short-time work is not even -- it's not easy for everyone. We dramatically reduced our investments in all business units to save liquidity. And currently, we are investigation -- investigating which projects we will restart based on the current corona development. In general, we see a return to office activities, especially key admin functions, both for ourselves, but more importantly, also for our customers. We are making any effort to ensure that our business is impacted at a minimum and developed a global back-to-office plan, which we now implement in dependency of the local corona developments. We are still focusing on maximizing liquidity and profitability of the group to ensure the business continuity. Now back to Rüdiger.

Thanks, Sven. Ladies and gentlemen, when the going gets tough, the tough gets going. The previous slide, follow me, please, to Slide 13, have again indicated that we delivered and that ACT is working, that JUMP is working and delivering. However, lockdowns and travel restrictions may appear on the horizon. We remain cautious on our outlook for the year. We believe that based on our prudent assessment of market trends, our market positioning and all our efforts taken so far, we owe you a bit more to be a little bit more precise. We are currently envisaging a revenue of EUR 195 million to EUR 203 million for the group overall as an effect from the current corona situation. Assuming that there is further tightening of corona impact or even that there is no further tightening of corona effect or even a second lockdown in our core markets. We believe to generate an EBITDA in the range of EUR 24 million to EUR 28 million for the full year. For the adjusted free cash flow, we continue to forecast a significant decline compared to 2019, but still a positive number. We, as the management team of FP, will do the utmost to achieve these objectives under these difficult circumstances. FP, ladies and gentlemen, is on track. ACT remains. Now I will give back to Maik and to our operator for questions and answers. Thank you.

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

[Operator Instructions] And the first question comes from Peter Rothenaicher from Baader Bank.

So firstly, I would say I'm positively surprised regarding the result given this decline in sales we have seen in the second quarter. So congratulations to this. With regard to your guidance, are you expecting EUR 195 million to EUR 203 million sales? We have seen in the first half of the year a very positive performance of Mail Services. To what extent will Mail Services contribute to this sales expectation?

Well, maybe you want to add, Patricius, but I think we are doing quite well. We have a positive increase there, but also the effects of our redesign, reengineering is helping quite a bit. We had quite some problems with this part of the business in the past, but it looks like we are there, we're on track. Patricius, you want to maybe comment and add?

Yes. We started quite well into the first quarter of this year. Actually, we increased volume to the previous year. And then corona then hit us in the volumes supposed to be in mails. But I think we are quite optimistic to get back on ground of that until the end of the year. And so that's what we expect. But it will take some time to really come back, I would say, to the pre-corona levels. That's something we'll have to watch. But the biggest dip that we had, I think, has passed us so far.

So with regard to absolute sales contribution of Mail Services, do you expect here an increase versus last year? So you were up already in the first half of the year. And my question was related to that, how much of sales will Mail Services contribute? And on the other hand then, how strong is then the expected decline in the other areas?

Well, Mail Services contributes a bit less than 1/3, and we expect this to be also until -- the development until the end of the year.

So you do not expect here a considerable improvement in absolute volume?

Due to corona, no.

Okay. Then the other question regarding your remarks with Software/Digital business, that you're expecting here a strategic review. Could you be a little bit more precise in what direction may there be a strategic review? Is the in-discussion perhaps to step out of some businesses to do acquisitions or what? Can you give here some more information?

In regards to IT, we are currently evaluating, together with an external partner, what is the right market approach, what is to clearly define the value proposition, where do we have the U.S. piece compared to competitors, to be more precise there, though, that we see, okay, which market we address with which solutions. It's not that we currently plan to step out on that. It's more to see how we can probably better address the markets. So we are evaluating different strategic changes there to pivot probably in the one or the other direction. That's what we're currently doing. So a little bit probably what we see is that go a little bit away from automation, connection of PLCs more in the direction of energy markets and real estate so that -- and in the real estate sector, more focusing on energy management. So that's what we're currently evaluating there, as I said, and then we hope that process will -- is planned to end in the fourth quarter of this year. And then we have definitely a different market approach than we have today.

Might this result in some extraordinary charges?

In which direction you mean?

So yes, some P&L impact that you have to book here some charges.

No, no.

So thank you for the remarks. At the beginning also, we had the toolbox available. One part of the toolbox was just described by Sven, my colleague. Of course, we don't look into the other toolboxes also. As you know, also acquisitions are not out. We always had it as part of the plan, and other options are also not excluded. That's what I wanted to say. But it's not concrete enough to talk about anything at this time being. We are facing, as you know, quite some challenges in the current business, and we want to focus quite some attention to keep customer happy, to keep liquidity and, of course, also to develop our current business as much as possible in these times.