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

Hello, and welcome to the Loomis Q3 2020 Report. [Operator Instructions] 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. Good morning, everyone, and welcome to the third quarter presentation from Loomis. I'm Patrik Andersson, CEO of Loomis. And with me here today, I have Kristian Ackeby, who is our CFO; and Anders Haker, Chief Investor Relations Officer. So I will give a short overview of the quarter and then open up for questions. So let's start the presentation and turn to the next page. Just a few comments on the corona pandemic. I'm not going to go through all of the points on the slide. But just to mention a couple of them. So one is that health and well-being of our employees, of course, on the top of the agenda. We have actually spent quite a lot of money and resources to put the appropriate measures in place. I think we now are in a good position when it comes to health and well-being of the employees. I will also ask many of the employees who are listening into this call, or later the tape version, I would just say that all Loomis employees have done a great and fantastic job in maintaining high-quality service despite a quite challenging situation. So all credit and respect to the employees. I'd also like to mention that there are quite a number of false rumors circulating around the fact that cash should spread virus -- spread the virus, and I would really like to stress that these rumors have been denied by all medical -- or certain medical experts, and there is more information available at our web page, where you can read more about that. And I'd just also like to say that we have taken a lot of other measures to safeguard the operational and financial health of the company. We are in good shape. The cash flow is strong. And we have a very strong position in the market. And we are also well prepared for the opportunities which are now opening up as we speak, but also for future opportunities. A lot of things will happen in the market, and we are ready for that. Having said that, I'd like to turn to the next page, and just go through a couple of highlights from the report. And I will come back to some of these bullet points later in my presentation. But just in summary, as we have communicated before, we have now launched Loomis Pay, which is a complete platform for merchants. We have started the rollout in Denmark. And I'll give a couple of comments on that later. And now the plan is we will actually launch in Sweden beginning of 2021, and then we will roll out in additional markets across the Nordics. You have also -- some of you might have seen that we sent out a press release yesterday, and the Loomis Board now is proposing a dividend of SEK 5.5 per share. An extra shareholder meeting will be held at 10th of December 2021 to decide on that proposal. I'd also like to mention that due to the corona pandemic, we believe that the revenue target of SEK 24 billion in 2021 will likely not be achieved and that's why we have removed that target now from our plans and targets for 2021. In the quarter, we had a real growth of 7%. We had an acquisition of Nokas in Sweden, and that integration process is ongoing. The organic growth was at minus 9%. And we see significant improvements in the third quarter compared to the second quarter as business is opening up. Of course, now the situation is changing a bit, but I'll come back to that. We have a less negative impact in U.S. compared to Europe. And that's the structure of the customer portfolio that makes that difference. We have had a very high-quality of services in all our countries despite the challenging situation. And as I mentioned before, new opportunities are opening up in many different areas. The operating margin was at 11.5%, if we exclude Loomis Pay. And we see that the operating margin is now trending in a positive way, both in Europe and the U.S. And just to mention the U.S. operations increased the margin by close to 2% in the quarter despite the pandemic, but I'll get back to that more later. The EPS is somewhat impacted by a restructuring program we are now initiating in certain European markets. That will be done at the end of this year and in Q1, and that will have a positive impact on the margins and the profitability in Europe in 2021. We also see a strong cash flow in Loomis, and that has to do with the cash management programs, less capital expenditure. And we have been also then very careful in -- with OpEx, and that has had a positive impact on the cash flow. So these are the highlights. Let's turn then to next page, which is just a graph showing the margin development in a more historical perspective. And as I mentioned, we had a strong margin recovery in Q3 versus Q2, and this is then excluding Loomis Pay, so it's easy to compare. Let's then turn to the next page, which is Segment Europe. And the real growth was minus 12%. And as I mentioned before, we have now integrating -- or we are integrating Nokas that we bought some time ago. And that integration is ongoing, and it's expected to yield positive results during 2021. That integration is going very much according to plan. The organic growth was at 14 -- minus 14%. Of course, all is due to the pandemic, of course. But we see significant improvements compared to the second quarter this year in basically all our markets. And as I mentioned, several growth opportunities are identified, both when it comes to banks outsourcing more when it comes to central banks wanting to outsource more cash operations. So we see that happening in many of our markets. When it comes to the operating margin, that ended at 9.4%. And of course, it's influenced by lower volumes, but we see a significant margin expansion if you compare them to the second quarter. And the delta is actually as much as 12.8%. So that's a strong recovery. And when it comes to France, we have the integration process ongoing when it comes to Prosegur France that we bought earlier, and we are expecting that now to continue with full force, and we see -- we will see margin increasing in France in 2021. And as I mentioned before, we have now initiated a restructuring program in certain European markets and we will sort of implement that at the end of this year and in Q1. And then from Q2, that will have a positive impact on the margins in Europe. So just having said that, I'd like to thank the European and LATAM team for a great job despite the circumstances. Thank you very much. Let's turn to the next page, which is then United States. USA. The organic growth was at minus 3%. But I have to say that we had -- we saw a positive organic growth actually in September. So during the quarter, we saw that the top line was coming back stronger and stronger. SafePoint revenue is expanding and accounted for 17% of total U.S. revenue. And we see also that the revenue will come back as the pandemic situation is improving. We have a very strong pipeline when it comes to SafePoint, and this year will be a very good SafePoint year also when we look into Q4. CMS was at 34%. Of course, this is affected by the pandemic, and that will continue to increase as the situation is normalizing. And we also have had a strong focus on keeping a high-quality of our service, and we have kept all our branches opened during the pandemic. And we see now that we attract new customers who are coming to us because of the high-quality of services. So that's a very positive effect of focusing on the service quality and keeping our branches open. We see also that revenue from the ATM business is actually accelerating, and that is one of the reasons why we had growth in September. We see that, that is one element, but there's other elements that are pointing that outsourcing in many different shapes will -- is happening now actually and will continue to happen. Operating margin was at 15.5%. All-time high operating margin for the third quarter. And there are 3 elements behind that. First of all, SafePoint expansions is helping the margin. We have focused on customer portfolios with high-quality people or companies, customers that want to have a high quality. That's been our focus. But also efficiency programs, very strong efficiency programs in branches, drives the margin and have, among other things, reduced the number of overtime hours. That is helping the profitability. So having said this, I would like also to thank the U.S. team for an excellent performance in the quarter. Thank you very much. Let's turn to the next page. And let me talk a bit about Loomis Pay. As many of you remember, we announced the launch of Loomis Pay some weeks ago. And just a short update, it's a -- on Loomis Pay, it's a solution, it's a service that is supporting small and midsized retailers with all payments in store. So it's 1 contract, 1 contact, 1 settlement for all payments, as you can see from this slide. Let's turn to next page. And just to say that now Loomis Pay has been successfully launched in Denmark. We actually launched on October 1, to be specific. And so far, I mean, it's early days still -- so far, we have had positive merchant response. In all aspects, what we see and what's interesting is that Loomis Pay also drives cash and SafePoint growth. So some of these customers have had done their services when it comes to cash themselves. And now they integrate SafePoint or other cash services into the offering. So next step is now to launch in Sweden in the beginning of next year. And then the rest of the Nordic countries will follow. And then, of course, the plan is to launch in more Loomis countries as things evolve. That -- let me talk a bit about -- more about Loomis Pay, and let's turn to the next page, where you can see a case which is quite illustrative when it comes to Loomis Pay. So just to be a bit more specific, this is a customer in Copenhagen. It's called -- the customer is Copenhagen Downtown Hostel, which I actually visited myself some time ago. And if you look at the left-hand of the slide, then you had a description of the old solution. So we had 6 waiters, they shared 2 POS systems, just 2 POS systems. All orders were written by hand. And that made the customer service and payment quite slow. So you actually lost sales in peak hours. People could not order as they wanted. And they themselves did a cash management, so they counted all the cash and then someone went to the bank to put that in. So the new Loomis Pay solution is all waiters now have their own mobile POS system. All orders to the kitchen, to the bar are digitalized and it makes the service very quick and smooth. And sales is up. They can serve more customer and the sales is up. And they have integrated a SafePoint solution where we take care of the pickup and the cash management. So this is very promising and very illustrative for how we want Loomis Pay to work. And this is actually what we have hoped for. And as we speak now, we are now launching this to many more customers. So that was a bit about Loomis Pay, and then I turn to the next page, which is the P&L, which I'm not intending to go through. That's more there as a service. So these are -- I think, I've been covering the most important topics, and therefore, let's turn to the next page and to the Q&A. And I say, operator, we now open up for questions, please.

[Operator Instructions] Our first question comes from the line of Johan Eliason of Kepler Cheuvreux.

Yes. Just a question about this revenue target 2021. How do you see the margin development?

Yes. We haven't changed the guidance on the margin. We keep that margin target as it is.

And just to remind me what it is.

It's between 12% and 14%.

Excellent. Then on Loomis Pay, it looks interesting, but I'm just a bit curious about the development in Sweden, for example, but we see the main banks, Swedbank and also Handelsbanken now putting their pay solutions up for sale. Why do you think that is happening? Is there a threat coming from Ingenico, worldwide Bambora, et cetera, what's happening from that point of view, you think?

I think that -- what I understand is that banks -- that's not core business for the banks. They don't focus on sort of merchant payments and I think that also what I heard is that they don't want to invest in IT systems and so on to continue that development. So that's a natural step that they're stepping out. And that opens up for many other players, both fintech players and players like ourselves. So I think that in itself, it's positive for us and for the other competitors in the market.

Would you be a buyer of those businesses?

No we are building our own platform from scratch. We don't want to have any legacy systems. We want to have a modern up-to-date system, which is cost efficient.

Our next question comes from the line of Daniel Thorsson of ABG.

Yes. I start off with a short one. Could you please provide us with the net installations of SafePoint in the quarter? Would be very helpful.

Yes. It's more than 1,000 installations in the quarter.

Okay. Excellent. And then a question on the restructuring program in Europe. Can you please explain more what actions you will be taking? I guess it is not really around closing branches, but what could it be?

No. So it's -- we've now taken the opportunity to adjust the cost base in some countries, especially in the U.K., where we actually closed a couple of branches but we need to reduce the workforce, and we will reduce the fleet. The most of the restructuring will happen in the U.K., but also in some bits in -- some smaller parts in other countries as well. The total restructuring cost is SEK 160 million, which will be taken in some parts in Q3, the most part in Q4 and that will have a payback time, which is below 1 year. We will see the effects. All the effects should be seen in Q2 2021.

Okay. That's clear. And related to U.K., a question on that, we saw a 40% decline in U.K. revenues in Q3 now. I guess that you are adjusting cost base based on a lower volume. But what is really reasonable to expect here going forward? Is it come back to maybe 20% to what we saw historically? Or how do you think?

It's very difficult to say. We don't -- I think that if you look at the whole, all EU Loomis countries, the 1 that is sticking out, to some extent, is U.K. because of the closing down of big parts of society. And we believe that it's necessary. We don't think that the volumes will come back exactly to the same level. We think that maybe 20% minus is a bit too pessimistic. But we take now that we need to adopt the cost base also when we look into the future.

Okay. Excellent. Final one on Loomis Pay. If I read the accounting tables here correctly. Did we see a SEK 3 million revenue from Loomis Pay in Q3?

Yes, that's correct. That is right.

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

A follow-up on Loomis Pay. As we going forward now and if this becomes a success, when it comes to -- you've said that the costs or the net effect on results will come in the other segment when it comes to reporting. But -- how -- when it comes to sales because, I guess, I mean you will have -- in some cases you will drive the SafePoint and the cash services. And in some cases, there could be some cannibalization perhaps on existing cash services. So how will sales be reported in? Will it come in Europe? Or will it show in the other segment? Or how will that be reported and handled?

It will be dependent on what kind of sale it is. But I mean, when it is related to Loomis Pay, it will be reported as Loomis Pay, so to say. And currently, we report Loomis Pay in other, and that is due to the size of it currently in how we run the business. That could, of course, potentially change. And when you look into SafePoint sales, for example, if there is a SafePoint, that is part of the more CIT/CMS business, and then it's more related to the Europe and the U.S. segment as we have in the reporting today.

So if you sign a Loomis Pay contract with a customer, part of those revenues will then come to Europe and part will come to the other segment.

Yes. It would be -- I mean, it would be -- it might be technical now, but we will -- then we'll get both internal sales and external sales, so it will be part of the consolidation. So you will have more -- if you look into Loomis, in general, we have relatively small amount elimination on the sales line since we have a little cross-border or little between the segments, but that might increase due to what you're referring to.

So yes, part of the sales will go into Loomis Pay and part of the sales will go into Segment Europe, yes.

Okay. On the sort of current trading, could you say something about the monthly trend, both in Europe and the U.S.? And maybe if you can touch upon October as well?

We haven't got any numbers for October yet, and we're not trying to guide on a monthly basis. But what we can say is that we don't -- I mean, U.S. -- operations in U.S. is very stable, and we don't foresee any changes from what we have seen before. It's a very stable operation right now. In Europe, we see now the second or the third wave, whatever you call it, of the pandemic. However, we don't foresee any fall back into April mode or June mode. We are much more prepared now than we were before. However, where the top line goes, it's a bit difficult to say right now. But we -- as of now, we don't see any -- that we're going back to Q2 numbers in any way.

Yes, sure. But is it possible to give some more flavor on the monthly -- month-by-month trend, July, August, September. And I guess, also...

I think that both in Europe and U.S., there is an increasing trend, both in the top line and in the bottom line. It has improved every month since April. And as you saw also in the report, September is -- we're showing organic growth in the U.S. So that -- I think it's a very positive sign that things are moving in the right direction in the U.S.

And in the U.S., just on the ATM side, you're mentioning that you are seeing things happening now on the outsourcing side. Could you perhaps quantify what kind of potential deal sizes are we talking about here?