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

Ladies and gentlemen, hello, and welcome to the Loomis Q3 '21 Report. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Patrik Andersson. Please go ahead, sir.

Thank you very much. Good morning, everyone, and welcome to the third quarter presentation from Loomis. I am 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, which is the disclaimer slide, which we don't look at that much. So we turn to the next page. And I just like to start to say that we think that it's important to give a balanced picture of the cash market as we live very close to this market. In that respect, I just wanted to underline a couple of things when it comes to cash and payments. So first of all, cash is the dominant payment method globally. 70% of the point-of-sales and person-to-person payments in the European area, EU area is, according to ECB, done with cash. Cash in circulation is growing in Europe and in the U.S., and that has been accelerated during the COVID period, as you see from the graphs. Cash is also important from an inclusion point of view. Many households are unbanked or under-banked, as we used to say. And in the U.S., we see that up to 20% of the households are unbanked or under-banked. And restricting the use of cash will exclude a large part of the population, especially people with lower incomes. So Loomis is taking an active part in several initiatives to protect cash. We do that locally, of course, regionally and also globally. But post-COVID, many opportunities will open up for Loomis. So what we see now is that retailers and banks are looking for efficiencies as they seek to improve their performance. We see that technology and automation will play an important role in the cash ecosystem. We see that already now or have seen for some time in the U.S., and that will happen in Europe as well as of now. We believe that we are very well positioned for taking market share and grow in this new landscape, as have been developed during the last year. So let's turn to the next page, please. And these are the highlights of the quarter. I will get back to some of the bullet points later in my presentation. So as I mentioned on the last slide, many opportunities are opening up right now. First -- so first, we see that further outsourcing of CMS and ATM as an effect of the pandemic, especially that we see in the U.S. We see also that growth opportunities for the core business will grow as activities in society will return to more normal levels. We see that travel and tourism have not fully recovered, and that will happen from now. We expect -- and that will have a very positive impact on our FX business, of course, but also on our local businesses around the world. Real growth was at 11% versus minus 7%. We see that Automatia, the ATM company in Finland, and the acquisition in Switzerland, Swiss Post, are the main factors to drive the real growth. Organic growth was at 6%. We see overall, continued steady improvement month-by-month. We see, of course, continued very positive developments in the U.S. And we see that the European market is more resilient now during the spread of the delta virus. So we have been much better to handle that situation. We see also that the European market -- or the European markets are recovering, especially at the end of September. Operating margin is at 12%. And that is, of course, an effect of the volumes coming back, but also the cost efficiency we have been implementing. And it's interesting to note that 12% is also the margin we've had set out for our strategy period until 2021. So we also have, as you see, at the end of the slide, a strong cash flow of 96%. So let's turn to the next page, which is a slide giving an illustration of what I've said before and the recovery we have experienced. So the low point was really in Q2 '20, and we've seen a steady recovery after that, pending on how societies have opened up, and as I said, 12%, excluding Pay in the quarter, which is, in my view at least, a strong margin. So let's turn to the next page, and let's start with Europe and LatAm. As I said before, overall, a very strong recovery in the quarter, especially when it comes to the margin. When it comes to the top line, we had a real growth of 8%. Acquisitions in Finland and Switzerland is, of course, helping here. I can say that the integrations we are now working with in both Finland and Switzerland are progressing according to plan. And I think that we see a lot of benefit from those 2 acquisitions in the coming quarters and years. Organic growth was at minus 1%. We had a negative growth in July and August, but volumes recovered strongly and started growing in September. And gradually, during September, volumes came back. We should also keep in mind that societies were also open in Q3 last year, so the comparison is a bit hard. We see that less restrictions in societies are expected, of course, with a big disclaimer, as always. We also see -- because we don't know if there comes a new wave of COVID, of course, but we assume that societies will remain open of now. And we see, in addition to that, increased travel and tourism that will also support growth for the coming quarters and 2022. Operating margin at 11.1%. We have worked a lot with our cost base during 2020 and 2019. And we see now that when volumes are coming back, that has a positive impact on the margin. And we have also synergies from the acquisition in Sweden and Finland that will -- that we see in the results. So let's turn to the next page and over to the U.S. I would say, overall, a very strong performance in the quarter. For the top line, we had an organic growth of 14% in the quarter. We see that CIT and the CMS businesses are continuing to recover, and we saw a nice and high growth for both these services during the quarter. A very strong growth for SafePoint. We are now installing on a record level, and we had close to 20% revenue growth during the quarter. And SafePoint is now having an 18% share of the total U.S. revenue, and we expect that to increase further. This year, 2021 will be the best SafePoint year ever in terms of installed base and revenue. And the pipeline for 2022 is very strong. But we also see a very positive trend when it comes to ATM revenue, and that's unchanged from previous quarters. When it comes to operating margin, we see a shift in the U.S. towards more automation and more outsourcing. And in our case, we see that in the SafePoint and ATM revenue, which is then contributing to a very solid margin in the U.S. We have a labor shortage in the U.S. business at all, I would say, all other companies, and that is increasing over time from a temporary point of view. We see now that the COVID checks that the Biden administration has handed out is going away. And we see also that we are -- the planned price increases will take place as planned. And thereby, we can also increase the normal salary. So we will have maybe a bit of a challenge in Q4, but after that, we are very much on top of this situation. And then EBITA in absolute terms was the highest in a single quarter, which is, of course, a very good sign of the strength of the business. Let's turn to the next page and go to Loomis Pay. And it's full speed ahead when it comes to Loomis Pay. We are working on several avenues. Sales and marketing activities to grow the top line, which is, of course, the focus. So we are building up the local sales organization. We are working a lot with different marketing activities, especially, of course, digital marketing, but also other ways to stimulate the revenue. All the time, we are working product development to strengthen the offering further. It is a very good offering. We know that from our customer feedback, but we continue to work to improve the product. The market -- the Nordic market is quite big. It's approximately SEK 15 billion, and that's why we have been focusing on that market as a starting point. The plan has always been to do that. And this week, we have -- we are launching in Norway and then, thereby, adding the third country after Sweden and Denmark. And this time, we launched Loomis Pay together with a partner in the Norwegian market. And as previously said, we will come back with more specific KPIs for Loomis Pay at our Capital Markets Day taking place later. So let's turn to the next page. And here, as a reference point, we have the full P&L, and I've been through most of the points. So let's turn to the next page, which is the Q&A session. So I'm through with my presentation. So operator, we now open up for questions.

[Operator Instructions] We have a first question from Karl-Johan Bonnevier from DNB Markets.

Patrik and Kristian, just on the U.S., to come back, a very strong quarter looking at -- considering the kind of cost pressure you must have had in the operation. Could you detail how you've been able to cope with the situation so much better than your peer, Brink's?

No. I think that, first of all, we have very good control of the staff, I mean, the efficiency and the staffing situation in the U.S. So we know all the time where we are. We have been able to use overtime, and that's what you see written in the figures to handle the growth. We are now on our way to hire more people. And as I said or indicated, we have had good progress when it comes to adding more people to the business, thereby, overtime will be reduced in the coming quarters. So I think that a good plan and a good execution of that plan is behind the numbers, to answer your question.

And when you look at the U.S. for the moment, are volumes back to pre-pandemic levels, also when you look at the traditional CIT/CMS operation?

Yes, I would say they are. They are -- I mean as retailers and -- especially retailers are now opening up again, we see especially the volumes coming back in the CIT segment. So I would say that we are -- also when it comes to CIT, we're in a good momentum and volumes are coming back to the normal levels, yes.

Excellent. And just to finish off on the U.S., with the strong momentum you have for SafePoint, have you passed 40,000 in installed base there now?

We are getting close to that. I don't have the exact figures. We -- I don't want to talk too much about the number. But I mean I think that we are very close to or spot on, I would say, to 40,000, but -- or there around. So I think that we have a very good momentum when it comes to SafePoint.

Excellent. And just on Europe as well, looking at the acquisitions, have you been able, during this period, to finalize the integration of Prosegur's operation in France and the Nokas in Sweden?

Yes, we have. We see now the benefits of both these 2 acquisitions. And there are -- basically, there are some small things to be done still, but the majority in -- to the greatest extent, we have finalized both these 2 acquisitions, yes.

Excellent. And on the Finnish and Swiss acquisition, you're still -- I guess it's -- they are not fully integrated at this stage, but you still see the same kind of opportunity there.

Yes. We are still in the integration phase of these 2 businesses. The Swiss business, that would take some time. It's quite a big business that needs to be integrated. That will take some more time. We are also -- some things to be done still when it comes to the Finnish integration. So we expect that to continue a couple of more quarters.

Next question from Daniel Thorsson from ABG.

I start with a question on SafePoint launch in Europe. Is it anything in the pandemic that has brought that market more relevant today than a few years back when you didn't really succeed with that product in Europe?

I think, first of all, I think we have a quite a nice base in Europe as well, of course, not at the same level as in U.S. But we have a nice base in Europe. Of course, the 2 -- last year has been quite difficult to work with the SafePoint offering. I think that, as I said in the beginning, when now retailers are looking for more efficiencies, more streamlining of operations, I think that SafePoint will be even more relevant in the European markets the coming years.

Okay, I see. And then a question on Loomis Pay. I mean, really, how should we think about the ramp-up here in the coming 4 to 5 quarters? And also, what kind of penetration is needed on your Nordic merchant base to reach what you think is a sufficient level to reach your SEK 3 billion sales target in 2025?

I think that, as you say, we are still in a ramp-up phase. We're making good progress in Denmark. We are building now even more capacity in Sweden. We are launching in Norway. We will get back to more details later when we have the Capital Markets Day on the ramp-up and so on. But I think that you should see that we are still in a start-up phase. So when you look at the numbers we have presented, the SEK 3 billion is also including launches in countries outside the Nordics. So we are very much confident that we are moving according to the plan. We're launching in countries as we should. Of course, the revenue is still not there, but we are quite confident that, that would come. And we will get to even more detail in a couple of months.

Okay, I see. Just a final one. Has it developed relatively in line with what you expected for the first 4 quarters? Or has it been somewhat slower?

I mean I think it -- we are more or less in line with the expectations we have set. So we are following that time plan. And then, of course, it's a new business for us, so we learn new things every day, but it's more or less according to plan.

Next question from Viktor Lindeberg from Carnegie Investment Bank.

And starting off on, I think, a topic we touched upon on the SafePoint units, but maybe broader for both Europe and the U.S. looking into 2022. Could you maybe give us some indications of the net installations that you foresee in these markets for the next year or maybe for the medium term so we can sort of calibrate and understand the level of your ambitions here?

No, I -- what I would say is, to give you some input on the SafePoint, I think that SafePoint will be a very big focus both in Europe and U.S. next year. I don't want to talk about any installed base, but our assumption is that we're going to grow this business in the U.S., as we said, 10% to 15% in -- when it comes to revenue. And that's the number we should have. Right now, actually, we're growing faster than that, but that's the number we have given. And I think that, that is a very relevant number, and I would not be surprised if we can beat that number. In Europe, we don't talk about SafePoint right now as part of the revenue because it's still not that big. But I can assure you that next year will be a very, very big focus on SafePoint when it comes to Europe. And we have added sales resources, technical resources, support resources in Europe to grow the business further from where we stand today.

Understood. And the 15% to 20% revenue you mentioned, that is for the SafePoint in the U.S.? Or did you mean the entire segment?

No, I said 10% to 15% for the SafePoint revenue. That's the guidance we have given.

10% to 15%, understood. Looking at the European margins and trying to understand the development year-over-year, there are a couple of moving bits and pieces here, the government grants, the cost savings program and also the M&A impact. But could you maybe help us single out in this quarter how much of a dilutive impact to margins in Europe did you have from the acquisitions so that we can see what is maybe the true underlying performance here?

The acquisitions in Europe referring to here is mainly then the Finnish acquisition Automatia and Swiss Post. And if you take Automatia, the first one, that is more in line with group average, we could say. And when it comes to Swiss integration, we are closer to a breakeven, which we see as a very good result based on the fact that we took over a loss-making business.

Okay. Good. And maybe final from me before I get back to the queue. You also announced the buyback program last night of SEK 200 million. And I guess, it's balancing the strength of the balance sheet with your organic and M&A investment priorities. But can you maybe help us see on the M&A side, is this a lesser priority for you now? Or is it simply that you have room to execute on all these initiatives, including buybacks?

I think you should see it from 2 different angles. One is that we're very confident of the strength of the business, of course. Secondly, we see that we could do a lot of things. I mean we have a net debt to EBITDA of 1.2, 1.3, and that means that we have a lot of maneuver space both to do buybacks and then also to execute on the M&A agenda we have. So we can do both. There is no change in that respect in the strategy.

Next question from Peter Testa from One Investments.

Three questions maybe, some following up from ones just asked. If you look at SafePoint Europe and the pipeline, can you give any sort of sense as to whether you see the pipeline building up higher in -- with the sales resources at this stage? Or is it something you more plan on happening in 2022? And if there's any particular countries you'd call out in that regard.

I think that we are now getting ready for 2022, that is, as you say. We don't have -- in the U.S., we have bigger customer, national customer. In Europe, it's a bit different. We have more local customers, customers by country by country, which are not that big. So it's more several smaller customers in that respect. And we believe very much that the offering we have is very relevant, especially in markets -- the big markets like U.K., Switzerland, France and Spain, I would say. These -- the bigger European countries there, that's where we put the focus.

Great. Okay. And then on the second question, just on understanding in European margin maybe to look at a slightly different way. If you look at the cost base that you now have in Europe, would you say that cost base is now, say, fully reflecting the cost plans that you've had outside of Switzerland and Finland? Or are there still some effects to come as this annualizes?

More or less, it's now reflected the restructuring plans we have done during the pandemic. What remains then, of course, to be seen is that we need to see now that the volumes are also coming back, which we see here when the countries are opening up. So that is how you should see it.

Yes. And the operating leverage on that, I guess, yes.

Okay. And then the last question is just on the comments around U.S. and labor. Would you expect that the overtime in Q4 would be less than Q3 or similar? And your comment on price increases, is that something that starts to earn through in Q4 or more in Q1?

It's -- the last one is more Q1. I would say that we will have -- as I said, we're getting the situation -- we are very much on top of the situation. We're taking the right actions. We're doing the right things in the U.S. It's -- I think that we still have to do some overtime in Q4. To what extent? Depends a bit where -- how the growth looks like and so on, but some effect, I would expect also in Q4.

Next question from Johan Dahl from Danske Bank.

Just a question on Europe there. It just seems that it's -- sort of revenues in Europe in September since have recovered fairly swiftly compared to July, August. Is that your sort of view of the development in Europe in Q3? And secondly, do you think that level in Europe, is that sustainable September going forward? And finally, also, if you could just comment what -- so in September, what type of -- how much of revenues pre-COVID were recovered, if you take into account what you did in the U.K., et cetera?

Now let's start with the first one. As you say, we saw that volumes are coming up, especially at the end of September. So gradually, during the quarter, we saw volumes coming back in Europe. And that is very much connected to -- it's a perfect correlation, I would say, how societies are opening up. And as soon as societies are opening up, we see that the volumes are coming back. And then also we should -- it's also the seasonality. We should keep in mind that Q3 is, from a seasonality point of view, a good quarter. We should keep in mind that basically, very little tourism has taken place in Europe. I mean we see in our FX business still affected. So that recovery has not -- so it's much more domestic tourism than anything else. So we're still waiting for the more sort of international tourism to take place. And we see signs in our FX business that, that is taking place also in September. So in that respect, I -- if nothing strange happening in terms of closing down societies again, I think that this is the level we should expect. And also, as we see more normalization, that we can also recover more of the volumes in Q4.

Can you give an index there where you are compared to pre-COVID, obviously, taking into account that you've reduced your sales in U.K., et cetera?

We -- it's very difficult to put a number right now on that one. So I would pass on that for the time being.

We have another question once again from Viktor Lindeberg from Carnegie Investment Bank.

Patrik, you mentioned in your initial remarks that there are interesting outsourcing opportunities now following the pandemic on both CMS and ATM. And can you maybe share a bit more what you see here? I mean it's the balancing act of, I guess, what is theoretical outsourcing potential versus reality and actual discussions being there and at some point maybe coming through in contract awards as well. So have you been awarded any contracts? Or are you in negotiations? Or is this more of a theoretical opportunity of yours?

No. I think that if you take area by area, if you look at the SafePoint, I mean, it's a very strong momentum. We see the outsourcing taking place. There is a lot of -- it's a very strong pipeline when it comes to negotiations and discussions. So -- then we see that in the numbers. I mean that's super strong. When it comes to ATM, it's the same thing. I think that many banks, they have now outsourced their ATM operations during the pandemic. And some of that might -- they take back, but the majority will not come back. And I think that banks are looking then at other banks and seeing how efficient that is. And that -- I think that, that will continue. We see also on the CMS side, I think that, that is a lot of negotiations going on. It's not like a huge contract, I would say, that we had some years ago with Bank of America. But a lot of discussion, branch per branch, area by area, vault by vault. And I think that in -- that there are a lot of opportunities that will come out. Now we need to be -- we have to meet the staff to be able to handle that. And then -- and as I said, we're seeing now that, that situation is improving week by week. So in all these areas, to give you a short answer, we see a lot of possibilities going forward in the U.S. market.

Okay. And on the FX business, that has been on very low levels and almost shut down in some markets. Now I understand it. Can you share with us the revenue delta from maybe pre-pandemic to where we are now and assuming more of a normalized level so we understand the mix shift here when it recovers?

To be honest, I think that the FX business has been on a very, very low level, almost nothing, to be honest, for a long period of time, unfortunately. And that's no surprise that nobody has been traveling. So -- and that is quite an impact because the margins in the FX business are very high, and that has an impact, especially -- all continuing in Europe, of course. So -- and that's been going on for some time. Then we have the gold business, which has, to some extent, compensated a bit, but absolutely not compensated fully. And we see now that in September, many countries continue to extend the holiday season. And we see now also that, that means that volumes are coming back, to some extent, in FX, and we expect that to improve in Q4 and also in 2022. So that will be an important profit provider into the European segment going forward.

Yes. And that was sort of my underlying question because looking back at CPoR, for instance, I think you mentioned it was just shy of EUR 40 million of annual revenue, which is probably virtually nothing now. But in addition to that, you also have some other revenue that was in the Loomis classic business. So is it fair to assume that this should be maybe a quantum of revenue delta to give a sense of where you are today versus where we'll be in normalized levels in next year or 2023?

I would say it's not totally gone, sort of, but you could estimate that 2/3 are gone, and profitability is close to 0 in the FX business currently.

Next question once again from Karl-Johan Bonnevier from DNB Markets.

Yes. I saw that you did some revaluation of goodwill in the quarter related to the European business. Could you detail what's behind that?

It's -- we always do a yearly review about our goodwill to review for impairment. And I think this impairment is around SEK 50 million, and that should be viewed in the light of that we have close to SEK 7 billion in goodwill. So it's an impairment to noncash transaction related to European segment.

And the not -- which part of Europe?

Sorry?

You could give us which operation that it relates to.

At this point, we don't announce that. It's related to Europe, the European segment.

Okay. And it would be great to get your comments on the Chilean situation as well.

Yes, that's right. We write about that in the report that we have been approached by the authorities in Chile regarding the matter you saw in the report. We don't have any more information right now than that. And we're, of course, reviewing the situation to understand what's behind this and looking into all the documents and so on. So we haven't been sort of formally accused yet about these matters. And so, of course, we take it very seriously. But we need now some time to review all the documents and review the situation as such. We should keep in mind that the sort of potential fine they have filed at us is at 6 -- slightly above USD 6 million.

That's the accusation related to the period prior to you acquiring the operation? Or is it more recent events in there as well?

No, I think that, that is also one thing we -- we are not exactly sure about the timing of these events. Was it before we acquired or after or both? So there's still some question marks around this that we need to look into and see how it falls. So it's a bit too early to say yet.

We don't have any more questions for the moment. [Operator Instructions] We don't have any question for the moment. [Operator Instructions] It seems we don't have any more questions. Back to you for the conclusion.

Yes. Thank you very much, everybody, for all the good questions and listening to the presentation. Thank you, and bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.