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 first 9 months 2021. [Operator Instructions] Let me now turn the floor over to your host, Carsten Lind, CEO of FP Group.

Thank you very much, so ladies and gentlemen, good morning, everyone, and welcome to our presentation of the financial results after the first 3 quarters here in 2021. And we will continue along the following agenda. First, we will look at the as-reported number. And as we also did the last time in the light of comparing year-on-year quarters where 2020 were, let's say, cleaned up in December. So for simplicity and for showing direction we will present again a normalized perspective on our EBITDA. Thereafter, we discuss a bit the individual business areas according to our segment reporting. And at the end, there will be some time for Q&A. So let's go to the first slide. So the revenues, a little bit higher than last year at EUR 148.9 million, including a EUR 2 million negative currency effect, yet higher. And then across the segments, we had a higher EUR 2.7 million in Mail Services and EUR 1 million more in our digital businesses. Whereas, the -- our business in the mailing, shipping and office solutions declined a bit. However, basically, is at the same level when we are looking -- if we're taking out the currency effects. So on the EBITDA side, a number of effects playing in here. Of course, we have a positive effect from the restructurings, the rightsizing that we have initiated and then also communicated. We're having a few negative effects on -- in terms of -- for example, the higher revenues in the -- sorry, in the Mail Services, of course, has a less EBITDA contribution. It's a low-margin business. Further, we had also some effect here by increasing our inventories and largely also some one-offs relating to further restructuring measures, and overall ending up at EUR 15.2 million as reported versus EUR 19.5 million in 2020. So moving forward there to the EBITDA bridge. We -- sorry, the normalized EBITDA. We basically, exactly as last time, said let's look at the operational performance by backing out own work capitalized, currency effects. And this time, also the corona-related subsidies that we received last year, mainly in the U.S., but they were quite significant of EUR 2.4 million, so -- versus EUR 200,000 this year, so they are backed out. And hence, we see that we are still improving our operational performance in this more realistic comparison between 2021 and 2020. So on free cash flow and net debt and operating cash flow and net debt. Again, we are here compared to last year, 9.6% versus 7.6%. However, special effects, so to speak, in there on negative impact from increased inventories, and also a negative impact in terms of one-off payments related to severance and the change of the leadership of the company during this year. So cash flow from the operating activities would be EUR 16.6 million, backing out these effects. And of course, the free cash flow will be higher with the same amount, EUR 6.7 million. So net debt reduced by EUR 2.4 million, and we keep on -- we keep the installments -- to paying installments in the direction of our banks. And, of course, very important here that we are still within our covenants and keeping on with our active and as we see very constructive dialogue with our lenders. So going into one segment, which is our business unit, Franking & Office Solutions, delivering mailing, shipping and office solutions to our customers. As already -- well, when we started out this year, of course, we were basically in a lockdown, and we had a very hard impact from the pandemic situation. We still have some of that in the business like everybody else, but it has eased quite a bit during the year, which of course, is very helpful. We have in here a negative currency effect of EUR 2.1 million. We have an increase around the -- revenue increase around the office solutions of about EUR 1 million. And overall, it's quite same level on last year if we take into consideration the currency effects. And then some of the -- I think, we are now, in general, quite a bit more positive in terms of both the short term and the longer term for this business area -- the mailing, shipping and office solutions. Since we have now changed the structure, we have now a European organization under one roof, one team. We have one North American team under one roof. And we now recently started sharing best practices on lead generation and sales. Further, we are driving forward this -- our opportunities in countries outside Germany by adding much more products, both hardware and software to our portfolio across different countries in order for doing a leveraged expansion of what we have. We have a lot of focus on generating more value around our hardware products by adding software, and I mentioned some of those the last time like the Parcel Shipping for helping customers spend -- save money when they ship their parcels. We have Vision 360, which is a cost accounting application that helps our franking machine customers to reduce their spends on parcel. So, overall, of course, much more work to do here. But we look at this more positive now. And we think that this continued focus on creating value for customers, delivering solutions and not just products, is a proper approach. And the one team approach definitely is helping us as well. Some new topics that we start looking into is how we much more actively and in a smart way within the limits of what you can do with customer data, actively apply and use what we actually know about our customers in terms of cross-selling and upselling on -- both on software products, but also on consumables and related products. So next area on our Software & Business Process Automation, we at least are here back to growth, and both in the input management and in the output management area. We further initiated focus on selling the total offering that we have. And with the total offering, we have now put together under one roof, the Mentana, the provider of FP Sign, De-Mail and further software products there together with IAB and also the software parts relating to Parcel Shipping and to Vision 360 is now under one roof. And we will continue selling and going to market with these products individually, but we have seen lately opportunities for creating value by handling and integrating the outgoing communications and handling the incoming communications for customers. So, let's say, business to consumer driven companies that are communicating on various channels with their customers have often issues in terms of connecting, let's say, the front office and the back office. And here, we see opportunities for delivering with all the software components and services we have a much richer offering to those customers. So, for example, we are doing that for a quite well-known telecommunications in Germany and more going forward. So at the end -- at the beginning of the year, we basically picked up a number of applications. I mean, the Vision 360 is a parcel shipping, our TransActMail or Hybrid Mail solutions. These were all solutions that in 2020, delivered 0 revenues, because they were not finalized, and they were in a space of a doubtful track forward. We have picked them up. We have now delivered the first versions. We are seeing revenues this year on those -- from those products and services, and we have also introduced in our input management, a completely new service into the market, where we are winning, like last time -- since the last time. Again, we have onboarded a number of customers on that service. So -- and further also around FP Sign that last year contributed very little. It's now contributing more. And we have learned through many channels. One is that we have established a customer council around digital signatures, and we have now, I think, learned a lot by integrating those customers into our product development. So the roadmap for any product now is based on such initiatives. And by completing those and by having commitment for continuous investments into those products, we think we can improve the situation further as we go forward. So, yes -- so strengthening of the sales activities. We have seen as well in the light of T-Systems exiting the market for De-Mail that this area has some opportunities for us. And in general, in the e-justice part as a segment of the German public sector we are already there. And we believe with focus on sales and by a continuous product development that this is one segment, one sector where we can do more as we go forward. And as mentioned around our mailing, shipping and office solutions, we are now driving the international rollout and building of further international versions of the Parcel Shipping software and Vision 360. So Mail Services. Again, here, a growth on 6.4% in a market that is default year-on-year following the mail volumes in Germany, which normally would -- you would count for a 2% negative is well -- yes, a reasonable revenue increase here. This business area is not high margin. However, of course, it is contributing a bit more in terms of having higher revenues this year. Stable area and no significant transformations as such, more continuous improvement and, of course, a lot of focus on sales. We are having here the effect that we are using the certified scan centers of Mail Services to help on that part of the input management proposition from our digital side that has a physical component in terms of incoming physical mail that is handled and delivered from Mail Services. So we get a better leverage in the investments and the resources that we already have. So approaching the end, so an update on the FUTURE@FP that we kicked off earlier. We have basically finalized or close to finalizing the first wave of the rightsizing that we announced. And everything else equal, we see there a EUR 9 million run rate improvement on our cost base. So the exit -- we will exit as a company having a lower cost base than when we were in the beginning of the year and as one lever for improving profitability of the company. Further, the new operating model in terms of the organization, it's now basically in place. Digital under one roof, simplified and more effective organization of the mailing, shipping and office solutions business. So -- and we have also, in the digital business area, we have taken steps around the digital business foundations, which largely means what you need to have in place for running a subscription-based or a software-as-a-service based business model as we see it with FP Sign, for example, but also Parcel Shipping, Vision 360, all of these are subscription-based models. And also the new inbound service, which typically are 2 to 3-year contract duration also in reality, is a subscription-based and a click-based business. So much more work to do in that area, but the first deliverables are there. So going forward, still here, of course, a lot to do. We will have a second wave. And in terms of restructuring and the rightsizing and the right shoring of the company. Clearly, the ERP/CRM is instrumental to making that happen. And also the program number 5 in terms of increasing value for customers, of course, will not and should not stop at any point in time. This is our continuous commitment to investing in both hardware and software product based on a close contact with customers and market. And yes, so this is basically where we stand. So a lot more to do as expected. And also in 2022, we will relentlessly drive this FUTURE@FP improvement program. So we, as was announced recently, we changed the guidance. And of course, everyone would ask why would the Q4 be less than the average of the first 3 quarters? So wait a minute. Why are you not delivering '20 or '21. The reason for that is not demand driven at all. It is the simple fact that we are, according to our plans, spending in the fourth quarter on the ERP/CRM systems on some of the developments of our -- of our digital products, as announced, and that such fundamental and future-oriented projects that comes at a cost. It costs real money. Hence, the guidance, not at the same level when we're looking at the full year. However, when we are comparing the full year guidance revised for '21 here with 2020, numbers are going in the right direction. So basically, that was all from my side. So back to the operator for the Q&A session.

[Operator Instructions] Our first question is from Peter Rothenaicher from Baader Bank AG.

Firstly, one question on your last remarks, the Q4 outlook. Can you give us an indication how big are these special costs for -- well, the new projects compared to the development, for example, in the third quarter?

Yes. So we -- on our projects spend and investments there, we are in the -- let's say, it's EUR 2 million to EUR 3 million.

And looking into 2022, how big are the necessary spendings in the upcoming year?

We have not given, let's say, any specific number on that. But we think -- probably we think, EUR 4 million to EUR 5 million of spending in 2022 across ERP/CRM, but also other development projects. As I said, we have a roadmap for each of our software products. And also, we have new services and products in the pipe. The Inputmanagement, for example, that we are -- that we basically initiated this year where we have -- and we have been floating this in the market only for 3-4 months, and we are getting some wins here in this market. So EUR 4 million to EUR 5 million, let's say, EUR 5 million of investment into continuing building the future for Francotyp.

Okay. And this EUR 2 million to EUR 3 million for the fourth quarter to what -- what compares it to the first 9 months this year?

It's a phasing -- it's a phasing, we have not spread out the spends on a monthly basis. But we have spent more, let's say, EUR 2 million -- EUR 2 million more -- EUR 2.5 million more or something in plan here we will spend in Q4 versus what was the average in the first 3 quarters.

Then could you give us some more indication about this Wave 2 you mentioned. So what do we have to expect here in terms of structuring. What are the measures, do your plan here significant further employee reduction? And what magnitude of one-off expenses do we have to expect?

Wave 2 is still in the making. The -- how we see it would be another EUR 5 million run rate improvement or EUR 5 million cost reduction from this initiative. And, of course, it goes along of a continued rightsizing in terms of automating and digitalizing further some of the base processes that we -- in the company, and it also relates here and there to nearshoring in terms of doing not just the rightsizing, but also the right shoring of Francotyp to bring our operating model much more in line with competition in the market.

And magnitude of one-off expenses in 2022?

See there an expenditure in the EUR 2 million to EUR 3 million range.

Then regarding your Franking Business, during the recent conference call you mentioned the opportunities in North America with new legislation, can you give us here an update what do you expect here in the upcoming year for the Franking Business, and in particularly from North America?