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 Q1 results of 2021. [Operator Instructions] Let me now turn the floor over to your host, Carsten Lind, Chief Executive Officer of FP Group. Please go ahead.

So, good morning, everyone, and a warm welcome for this presentation of our financial results for the first quarter 2021. I'm here in our headquarters in Berlin, together with Martin Geisel, Chief Financial Officer.

Good morning, everyone.

So let's kick it off and go through the presentation. And if -- so basically, on the high-level view on the financial results, clearly, impact from the pandemic situation. And you could even discuss here, if this is really a like-for-like or not since the first quarter 2020 was without influence from the pandemic situation. And clearly, the first quarter 2021 has a significant impact from the pandemic. So revenue declined EUR 5.5 million, which is 9.5%. And however, we did anticipate that, so it's in line with our expectations. The profitability at the EBITDA level is declining EUR 3.1 million. I would even say only one -- only EUR 3.1 million since we have not adjust the missing contribution from the lower revenues of EUR 3 million, but we also have, in that number, a lower level of own work capitalized of EUR 1.6 million and further, a provision for the restructurings of EUR 0.5 million. As well in the numbers, the first effects from what we could call the first part of the first wave of our restructurings of EUR 2.3 million effect since we are now in the situation having reduced the Executive Board from 4 to 2 people and also several heads on the second management level has also been made redundant. And as already announced earlier, we are taking further measures, and we are in negotiations and discussions with the employee representatives, i.e., the works council for the next part of the waves of restructuring. Also, we have a decrease in depreciation due to cleaning up the balance sheets as we announced and explained during the call on the fiscal 2020. And then, overall here, a consolidated net profit positive for EUR 0.9 million or just about EUR 1 million which, in the light of the pandemic situation, we think is a reasonable point of departure here in 2021. Going on to the next slides on the cash flows. We can see here that with countermeasures and strict cost control and focus on our working capital management despite the quite strong decline in the revenues, we have increased the cash flow from operations. The investment activities are back to a more normal level. And as I also have announced, we are now having a stage gate model in terms of investment. So we are doing these gradually, validating with markets, not taking off massive development projects with a questionable business case or in a situation where you need to learn as you go in terms of validating your products. Also to notice that cost for the ERP CRM system, the new system that we will install, are not here in -- at this point in time and also further costs from the future added fee program will largely be incurred in the course of the year, and they are not in with much here in the first quarter. So basically, very strong free cash flow and here, no longer any adjustments made. Part of that used to pay back bank debt of EUR 6.9 million being there now at EUR 29.5 million. And in terms of the cash at hand, as you can see at the lower part of the slide of EUR 20.5 million. That amount, together with our existing credit facilities, we consider to be a comfortable situation to continue and to go forward in 2021. So looking at the individual areas, on the next slide, starting out with the business area, software and BPA IoT. Of course -- well, on what is below this business area -- the following line. So on FP Sign, our digital signature solution, we have changed to -- so going in after targeted markets, we have now a very clear value proposition towards different segments. I will show, like the last time, again, the DATEV story in a second as an example of that. Still, significant amount of work to be done on both the product itself and the digital business foundations around the product as we also have announced. But we have seen through the better organization and through strengthening and working on the sales and go-to-market, we are seeing here a better performance from that area. On our IoT and other products that we are picking up and moving forward to become a solution, we basically -- this is still relatively early days on that, and we are here on enterprise solutions sales with long sales cycles of often 12 months plus. Also, of course, much larger deal size than, for example, with FP Sign. It's too early days. We are still driving this. And we will hopefully see outcomes of that later in the year. And around our digital office, again, more or less in the same situation that this is being picked up, new versions on the way and expected to launch there in the second half of the year. So bottom line, most of the charts associated with FP are year-on-year or quarter-on-quarter declines. Here, we have an increase, a growth of 6% compared to last year, which is still in the light of the larger portion of our solution areas here actually are negatively impacted by corona. On that scale, it is very small, but of course, a positive sign and having an increase and not a decrease is, of course, always better. However, we are definitely not yet satisfied or happy with this, and we impatiently are moving forward in terms of getting the work done, and there is a lot of work to get done before we can get better results in this area. So next slide. So an illumination of what does it mean to go to market in a targeted vertical or targeted niche approach. Quite a bit of work done around the tax consultants in Germany to understand the addressable market, which we consider as the total market. And of that, the serviceable market, where can we play a role. And we believe we can play a role largely not with the big 4, but with the one tier down on tax consultants. And we're very happy that DATEV as the leading provider of software and services for tax consultants has selected Francotyp as their software partner for adding digital signature around the application portfolio of DATEV. So in class act, this means that tax consultants can work much more effectively and efficiently in terms of their exchanges with their customers by using a digital signed annual report, tax statements and tax returns and further documents in a way that where they are comfortable in terms of the security, in terms of the data protection since FP Sign comes out of the box as a build in Germany, German cloud, your data will not leave Germany. And any legal framework, any compliance, any data protection set out by the standards in Germany, we will fulfill with FP Sign. So since this is announced recently, we -- in terms of the Q1 numbers, we don't have any effects in there yet from this collaboration with DATEV. We will have to see during the next quarter as how this opportunity here can unfold. And of course, we hope and drive forward to onboard, well, as many tax consultants as possible. Next slide. So the business area Franking & Office Solutions, not unexpectedly has quite a bit of a decline, EUR 5.1 million decline against 2020. But as said, this is a little bit of a difficult comparison and anomaly in the light of 2020 Q1 being not impacted by the pandemic situation and 2021, clearly, largely lockdown around most of the countries so the decline was expected. However -- yes, and this is something that we need to just to accept. We are still benefiting, of course, from a high percentage recurring revenues. But also there, again, with the year-on-year build in decline in the Franking machine market likely there a short and midterm impact also on consumables around the Franking machine. So Mail Services, which makes up around 30% of our revenues, this is a business model with the profitability, of course, strongly depending on the processed volumes and there are not that much of levers or that many still [Foreign Language] to significantly improve the profitability outlook on a stand-alone basis for where we are with Mail Services. We consider though that this is a quite solid performance of the business area and the decline of 3.4% is in line with the, let's say, normal year-on-year decline on mail volumes in the German-speaking countries or in Germany in isolation. So going further into the presentation here on our guidance. We, of course, after Q1, we definitely confirm the guidance and having delivered around EUR 5 million EBITDA here already after Q1, some might say, hey, wait a minute, you are now already delivering EUR 5 million, and you have EUR 6 million at the lower range. So what about the guidance? Well, first of all, the first quarter is traditionally always the strongest quarter in the year. Most of the costs associated with FUTURE@FP are not incurred yet, but will come later. And we are still in an uncertain situation around how the next quarters will unfold in light of the pandemic situation, et cetera. So at this point in time, we don't see any need to revise our full year targets, but we are comfortable that we can deliver on that, and we also see ourselves as delivering to the higher end of this guidance. So that would mean then an EBITDA, absolute terms, closer to the EUR 12 million and then to the EUR 6 million. So we think that -- and we see Q1 despite the pandemic situation and the challenges here, the work on picking up products and making them solutions, the rebuilding of our operating model, basically the vital 5 programs on the FUTURE@FP, we consider these financials, together with the FUTURE@FP program, to be a good foundation for the rest of the year, and we are comfortable based on this point of departure that we will deliver at the higher end of the guidance. These were the words. So now, there is time for a Q&A session.

[Operator Instructions] The very first question comes from Felix Ellmann from Warburg.

Yes. Congratulations for the good numbers. I actually have 3 questions that I'd like to pose. With regards to the depreciation and amortization levels, you showed EUR 4.5 million here, and that would be very attractive, in my view, looking towards the whole year. What would you expect to be the depreciation and amortization level? Would this be EUR 4.5 million times 4, something like EUR 18 million for the year? Or will it increase over the year? What do you expect here? This is the first question. The second question about the credit facilities. Your -- the former management announced a huge credit facility, big numbers here. And are these facilities still available? And if how high are they? And what are you planning to do with it? And the third question is more strategic. With regards to the DATEV cooperation or with the DATEV client, how was the competition there? Why do you think did you mainly win this? Was this mainly the point you mentioned that you're in German, the data keeps -- is kept in Germany? Or did you have competition within the German vendor field? And how were they? And why did you beat them? Could you elaborate a little bit on that?

So these were 3 questions, and let me ask -- let me answer question number 1 and 3, and I would ask Martin to comment on the credit and banking facility -- the credit facility. So basically, we expect the depreciation amortization to be around EUR 18 million to EUR 20 million for the full year. So you can say, basically, 4x and a bit -- 4x the Q1 number. So your assumption, we can confirm. And if I comment on the DATEV frame agreement that we have made there, yes, of course, there's always competition and there's always competition from both -- normally from the larger U.S. corporations, delivering digital signature, but also some of the other German DACH-based independent software vendors. And it's my perception that the reason why that we were selected was basically a combination of, let's say, fit-for-purpose functionality in our solution. It was based on a very deep and intensive work on really understanding the use case for the tax consultants to really make it clear the value they could get. And thirdly, that's combined also with what we consider to be an attractive pricing model. And of course, as you mentioned yourself, being also compliant with any rule and regulation in the German-speaking space, having the data not leaving Germany makes also a criteria here, especially against the U.S. competitors. But of course, it's no argument, again, German competitors because they will come with the same proposition. So a combination of what the product can do, the pricing scheme and also the legal framework and compliance that we deliver in Germany. Then there was a question on the credit facilities. I would ask Martin Geisel, Chief Financial Officer, to comment on that.

Yes. On the lending facilities, in total, we have a lending facility of around EUR 200 million with our banks. We are in very, very good and close relationship, regular communication. They appreciate the initiatives that have been taken and also the strong efforts and the strong commitment also on the working capital side that we are showing, which has also enabled us to repay a part of our current lending to them. So this is all in all in very good hands.

Yes. But again, this EUR 200 million in facilities seems to me quite a high level, which is, of course, nice, better than not to have any. But are you planning something with this dimensions of facilities?

Certainly, a part of that total lending facility of EUR 200 million that you rightfully say, is -- that is a high amount. And this is, of course, a good portion of that related to our M&A activities which, at the moment, is too early to communicate about. But we are, of course, looking for opportunities in the fields where we see strategic growth potential for us. So yes, you may say it is a high number, but it will definitely come time when we will utilize that.

So in other words, you could imagine using this EUR 200 million to acquire something, theoretically?

Yes, definitely. And well, as Martin commented, it's too early to comment on that. And also, in terms of the timing, as we have launched the FUTURE@FP, there are some clarification, some work we appreciate to get done there before the timing of doing an acquisition and dealing with that properly, would be right.

The next question comes from Peter Rothenaicher from Baader Bank.

First, a question on your Franking business. So your comments were a little bit skeptical regarding the further development in upcoming quarters. So if I think about the pandemic situation, we are seeing here some relief in the market. Therefore, I would expect that the increased willingness of customers to buy new Franking machines, even considering that the overall market is definitely not a growth market. But what is your view really on the development in the upcoming quarters. Don't you see here, hopefully increasing or an improved environment again?