Loomis AB (publ) (LOOMIS) Earnings Call Transcript & Summary

Hello, and welcome to the Loomis Q2 2020 Report. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present the CEO, Patrik Andersson. Please go ahead with your meeting.

Thank you very much. Good morning, everyone, and welcome to the second quarter presentation from Loomis. As you heard, I'm Patrik Andersson, the CEO. And with me here today, I have Kristian Ackeby, our CFO; and also Anders Haker, Chief Investor Relations Officer. I will give a short overview of the quarter and then at the end, open up for questions. So let's start the presentation and turn to the next page, which is about the corona pandemic. As everybody can understand, it's been quite a challenging quarter from many aspects. But we have put the well-being of our employees on the top of our agenda and quite spent a lot of attention and money and investments to safeguard the health and safety of our employees. I also would like to say that all Loomis employees have done a fantastic job in maintaining the high-quality of our services despite the tough situation we've had. So I'd like to thank all Loomis employees at this moment as well. I also like to highlight that there has been a lot of false rumors around cash, that cash is spreading the virus. And these rumors have been denied by many experts, also by the European Central Bank, WHO and many others, also the Swedish National Bank. They have confirmed that there is no heightened risk of using cash. And you can read more about that, all of that, at our website. We also have a very crucial role in the infrastructure of the society. And we noticed that every day that banks and central Banks, they are really keen that we are up operating our services. I also would like to come back to that, that there are also as we have had the service on a high level, there are many opportunities going forward for us, but I'll come back to that a bit later when I talk about the segments. All our branches have been running, but not everyone at full capacity, and we've been very focused on servicing our customers throughout the pandemic. Of course, we have cut all the costs we could and also postponed capital expenditure that you can see also from our P&L. I think that one strength we have had is the Loomis model, a very decentralized system that people on the ground take action every day to safeguard the service, but also reducing cost and manage the cost. We have -- as a consequence of the pandemic, we have postponed the dividend of SEK 11 per share. But we have also signed a new credit facility of SEK 1.2 billion to strengthen the balance sheet. Having said that, we are in a very good position from a financial point of view, and we have a positive free cash flow in the quarter of SEK 350 million despite the situation. So I would say that we are very strong from an operational and financial point of view, and we are well prepared for the rest of the year. I also would like to mention that we see very high cash levels in all countries, both in the U.S. and Europe. And there's never ever been so much cash in the societies we operate in since the 2008 financial crisis, that goes for both Europe and U.S. Having said that, let's turn to the next page and go through the highlights, and I'll come back to some of these highlights during my presentation later, but some bullet points. I talked about the dividend, but we also got the approval from the authorities for the Nokas acquisition in Sweden, and the integration is ongoing as we speak. The real growth was minus 18%. And we had last year, the acquisition of the Prosegur business in France that affected last year, of course. We have an organic growth of 20%. And we see, of course, significant negative effects from the pandemic. We see a larger negative impact in Europe compared to the U.S., and that has to do with the structure of the customer, structure of the contracts. We have more retailers or retailers -- smaller retailers in Europe, and in U.S., we have bigger financial institution and larger retailers and that makes a difference. The quality of the service continued to be a very high level. And as I said, we are -- see future opportunities. Operating margin was 4.8%. Again, of course, impacted by the volume losses we have had. But the trend is positive. I mean looking at the U.S., of course, we are in a very good spot there. But Europe has been recovering throughout the quarter, and we see positive operating profits in June. April was the worst month, of course, and then it's gradually been improving throughout the quarter. And as I said, a very strong quarter from a U.S. perspective. And last, but not least, operating cash flow, 264% of EBITDA. And here, we can see high cash conversion affected by lower capital expenditure and positive working capital movements. That's been one of our focus areas throughout the quarter. Let's turn to the next page and go into Europe. I mentioned the acquisition in France last year. Of course, this integration has paused a bit during the quarter, but now we're up running again. And that integration process has now been intensified. France is and will be a 2-player market going forward. And we see that we can realize the synergies and create a very stable market in France. And as I mentioned, the integration of Nokas is also initiated, and we expect positive results in next year. Organic growth was minus 29%. However, clear signs of recovery during the quarter, more countries are opening up as we speak. We see, of course, significant impact in Spain and France and U.K., but when it comes to Spain and France, we actually see quite a bit of an improvement during June. And I would also like to mention that this crisis also open up a lot of opportunities for us, both in Europe and U.S., but in Europe, especially when it comes to ATM fleets that are being outsourced, that we gain customer, we gain market share, there will be more opportunities for M&A going forward when some of our competitors are struggling in the market. Operating margin, 3.4% minus, of course, then impacted by lower volumes and then gradually an improvement during the quarter. So let's turn to next page, which is U.S. Organic growth was at minus 9%. And we had a good, I would say, good, a very good quarter when it comes to SafePoint. Now it counts -- continue to increase and accounted for 18% of the total U.S. revenue, which is also one of the factors behind the strong margin. I would say that from an installation point of view, it was also a strong quarter. We have a strong pipeline when it comes to SafePoint. We actually now just recently closed the contract of 350 SafePoints with one of the leading fast food chains in U.S., and that's very promising going forward. So a very strong pipeline when it comes to SafePoint. Of course, some of our customers have -- we have offered them to postpone some of the payments, but that will be picked up later during the year. So that's more of a timing effect. CMS, 33% of the total revenue. And of course, then impacted by the pandemic and that gives a shift in the business mix. I will also say that we have had very high focus on the quality of the service that we are open, that we service our customers. And we can also see an inflow of new customers coming to us. We also see that this event, the pandemic, is a trigger point for more outsourcing from the banks. Now it's a good opportunity to look at your own processes and then outsource what's the core business. So we see that in -- and that is really happening as we speak. So in that sense, it's quite positive for us. Operating margin was at 15.1% versus 13.7% last -- the same quarter last year. That's a fantastic margin. That's all-time high in a Q2. Of course, there are a couple of factors that's influencing that margin. One is that we have been able to reduce the overtime cost at this situation with employment in U.S. is a challenge. We have been able to reduce the over time and save quite a lot of costs on that side. We have a good expansion in the SafePoint business. But also, we have a structure in the U.S. with more customers coming from the financial side, but also bigger retailers, which is, in a way, protecting the top line. We are focusing on our customers with -- that are willing to pay for service, of course, as we always have done. And we have been able, I would say, in a very successful way to drive efficiency in all our branches in the U.S. So from that perspective, a fantastic result in the U.S. Let's turn to the next page. And I'm not intended to go through the P&L. You have heard my highlights during the call here. So I would just say that I'll turn to -- we turn to next page. And I would open up. Operator, we will now open up for questions.

[Operator Instructions] And our first question comes from the line of Daniel Thorsson of ABG Sundal Collier.

Yes. I start with a question on Europe, please. When you say that June was profitable, is that including the SEK 80 million governmental support you got in the quarter? And how do you split that out through the quarter, please?

Yes. So that's a good question. I think that -- just to be clear on that, we -- so the cost we have -- direct cost we had to handle the pandemic, so in terms of furloughing or cleaning or protection and things like that, it's double the cost as compared to what we got from the states. So net, we have more costs to handle the situation than we got money from the states, from the government to be specific.

I see. So that is actually just compensating a bit of your elevated costs. That's how we should see it?

Yes, yes.

It's not driving up -- yes.

No. No. On the contrary, it's -- we have negative impact from direct costs of the pandemic, yes.

Okay. And despite that, you did profitable segment Europe in June?

Yes. That's right.

Okay. Excellent, excellent. And then we'll see, in terms of organic declines per branches in Europe, where did you see the largest declines? And what magnitude are we talking about in a single branch? Are we talking about 50%, 60%, 70% decline in a single branch? Or what's kind of the magnitude here?

It's quite a big spread in Europe. I think that it's directly connected to the closedown of the society. So in that respect, I mean, I think the U.K. has been hit the most because U.K. has been totally closed for many months. So there is a direct correlation. Of course, also the countries which have quite a large FX business, foreign exchange business, has been impacted. That Norway, for instance, has had quite an impact. So it has -- the business mix and the closure in the countries, that's what's affecting.

Okay. And the best-performing countries in segment Europe, who are they in the quarter?

We have Turkey, for instance, which are actually showing growth in the quarter. We have the Latin American countries also in a very stable phase when it comes to the top line. And then on the other side of the spectrum, we have countries like U.K., Norway; Norway, depending on the large FX business; you have Belgium as well; and then in the middle, you have a large range of countries.

Okay, okay. And then the final question for me. On the U.S., if we look into Q3, we see that it looks like a second wave in some of the states in the U.S. Could that affect you negatively? Or have we seen the largest negative effects behind us still?

I think that's a good question. We're following that day by day. You're right. We see that there is a second wave. How that is impacting, I -- it's hard for me to say. I think that we would be on this level when it comes to top line, at least in the U.S., give and take a bit. But that's more -- that's how I see the situation today. That can change, of course, from day-to-day. But we see a relative stable situation. But then after that, we think that U.S. will be in a good spot going forward based on that society will open up. And as I said, many opportunities coming out from the SafePoint side, more outsourcing in the ATM side and things like that.

Okay. Interesting. I'll just end up with one as well. SafePoint net installations in the quarter, is that a figure you can give us?

Yes. It's above 1,000. So it's a very high number in specific given the circumstances.

Okay. Excellent. And the goodwill write-down in Europe, SEK 48 million, I think it was. What country did it relate to?

We -- it's a mix of different countries in Europe. We're taking a bit here and there. But I mean, we have goodwill of SEK 7 billion. So it's quite a small number in that sense. But it's a mix in Europe.

Our next question comes from the line of Johan Dahl of Danske Bank.

Just a couple of questions. I was just wondering if you could share possibly the organic growth in June for Europe when you claim to be profitable? And secondly, I was also wondering if you could describe a little bit in terms of FTEs, what you have been able to do in Europe in terms of permanent redundancies to mitigate the weak sales? And also what do you expect in terms of furloughs going forward?

Yes. So the number in Europe in June is about minus 20% about. And there is a big spread from -- as I mentioned, from country to country. So in that number, we're doing a decent profit. So -- and then we see also that -- we expect also in July that July, from a top line point of view, will be better than June. So we are in a positive momentum in Europe going forward. When it comes to the number of FTEs, I'll hand over to Kristian, he has full control over that.

Okay. Good. So regarding FTEs in Europe and during the quarter, we have furloughed a lot of people, of course. And at the most, we were at approximately 30% of the workforce within Europe. And you see, when you look into the numbers in the report, we are down on the FTE side slightly more than 15. There are currently still subsidies available in our largest countries in Europe. And they are available for Q3, as we can see right now. So I hope that gives a summary of the situation.

What can you say, Kristian, regarding sort of permanent cost out measures, the decisions you have taken or planned?

Yes. We -- of course, I mean, majority is furlough, but it also includes -- the FTE reductions also include permanent takeouts.

Our next question comes from the line of Karl-Johan Bonnevier of DNB Markets.

Yes. Good management of a difficult situation, I must say. Looking at -- you gave us a guidance that April was down -- was at 30% or something like that. But for the full group -- or 25% for the full group, slightly more for Europe. And now you're saying June was down in Europe by 25%. Could you just give us April and May numbers or the indication for it? And then maybe also give us some granularity if you are looking at, say, bigger markets like Spain, France, that is now is more out of this pandemic situation and the active close downs, at least, what kind of development you have seen in, say, volumes coming up to the end of the quarters in those markets? How quickly do they recover, so to say?

I mean I think that we were -- Europe was more hit than U.S. in the beginning and -- during the whole quarter. So I think we were down around 35%, 40% in the beginning of the quarter, and that's gradually been improving. And I think that we see that the big countries in Europe, like -- or the important -- all countries are important, of course. But if you look at France, Spain, Austria, Switzerland, we see nice improvement during the quarter. I think that U.K. still is a bit of a challenge due to the fact that it's been closing down. But this -- the big countries, Central Europe is recovering quite nicely.

And I guess there's -- as you pointed out, with the arguments of cash not spreading the virus, and that is obviously a risk of some sort of permanent damage to the volumes in the segment due to this, that cashless fight, it takes another step forward and so on. Is it too hard to measure that at this stage? Or do you have any idea of what kind of recovery levels we'll get back to, so to say?

I -- to be -- I think that U.S. is not an issue as such. And I think that we would see, as I said, a triggering of more outsourcing in the U.S. going forward. When it comes to Europe, it's a bit too early to say. And it varies from country to country. I think that -- I don't dare to speculate. We haven't seen any impact from that as we speak. It's a more general close down, and people are spending less money, that's what we see. We don't see any big impact of the virus and things like that. Of course, you can see signs on some shops in Sweden and so on and so forth. But that's more a sort of a specific country problem, I would say. In Spain and then in France, in Switzerland, in Austria, that's not an issue, I would say.

And I guess from your point of view, if we come to some sort of, say, change to demand patterns, your cost structure will allow you to balance that out to some extent?

Yes. That's right. I think that the thing which is very important is that we are not living on the -- I mean, the cash level in the society is just one part of the equation. I think that the outsourcing, the level of outsourcing is the most important. And I think that, again, that this event can trigger much more outsourcing from central banks, from commercial banks that ATM fleets will be outsourced. I think that this is -- that's something positive we at least bring with us. And I think that, that is what we're looking at to be closer to customers to pick that up that outsourcing that will come to the market.

Excellent. Fantastic development in the U.S. for you. You mentioned good customer inflow and could you share some more light on that?

Johan, I think that we have had, our philosophy or strategy has been to have high quality. We're not the cheapest in the market, to be honest. But we have had high quality, and we have kept that high quality throughout the quarter in the pandemic and that means that some customers maybe are not that happy with the -- some of the other providers, and we see that they are coming to us, and that's a clear sign. What we also see is that more bigger banks and bigger retailers are now looking at continue or start outsourcing because they see that this -- we can do this so much better than them, and it's clear signs of increased outsourcing in the marketplace.

Excellent. And just on the margin. Very strong margins in the U.S., obviously, looking at 15-plus in the quarter. And you are still alluding to that there is a negative mix in that, looking at CIT, CMS mix. Obviously, as SafePoint is helping -- must be helping then, being the big part of it. Or is there anything else happening underlying in the CIT, CMS mix we should be aware of?

No. I don't think so. I mean -- no, no. I mean we have -- I mean, the CIT volumes -- I mean, the stocks go down for sure, but that's been compensated by more ATM work. It's been compensated, but still -- we still have growth in the SafePoint side. So in that sense, I would say, that rather the mix is positive, so less CIT, more SafePoint, more CMS, more ATM. So -- and that has helped the margin. And we see that the ATM business is -- because what's happening is that some bank branches have closed or they don't open up as many hours, and then the ATMs have been sort of instead of banks in a way. So that service has been increasing during the quarter in the U.S.

Excellent. And finally, a final dividend decision for the current year, is that something we should expect to be announced around the Q3 of the quarter? Or how should we see that?

I didn't -- one more time...

Yes. No. Coming back with the final dividend decision. Obviously, you're still calling it postponed rather than fully canceled. Is that around Q3 we should expect that kind of communication?

Yes. I think so, yes. Around, Q3, beginning of Q4, I would say. And again, that's a Board of Directors' decision, that's not my decision. But of course, you're aware of that.

Our next question comes from the line of Mikael Löfdahl of Carnegie.

Yes. So first, a couple of questions on the government grants. You're only mentioning Europe in this sense. Have you received any grants or subsidies in the U.S.?

We -- Kristian here. We have not received any subsidies impacting the income statement in U.S.

And no postponed payroll taxes or anything like that?

We have postponed payments in U.S., that we have, but nothing that impacts the income statement.

Okay. So -- but it impacts the cash flow for the quarter then?

Yes.

Okay. Could you magnify that, perhaps?

I think in total, not going into segment, but in total, we estimate that we have delayed payments of SEK 200 million to SEK 300 million.