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

Hello, and welcome to the Loomis Q4 '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 with your meeting.

Thank you very much. Good morning, everyone, and welcome to the fourth quarter presentation for Loomis. As you heard, I'm Patrik Andersson, CEO of Loomis. And with me here today, I have Kristian Ackeby, CFO; and Anders Haker, Chief Investor Relations Officer. 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 page. So we quickly move on to the next page, which is about cash. And first, some comments when it comes to the cash market. As you can see from -- on the left -- right-hand side of the slide, cash in circulation continues to grow, as you can see here, both in the U.S. and in Europe. The ECB, European Central Bank, expressed strong support for cash and has put a number of activities in place to protect the access to cash. We also see the support for cash increasing in many countries, especially in times of geopolitical unrest, as we have today. So in many countries, it is not legal to deny cash payments anymore. We see that happening in many places. Cash payments are strongly correlated to the economic activity in a country. And as societies are opening up, volume is coming back to us and to the market. And during the COVID pandemic, new business opportunities open up for Loomis. And one example is, of course, what we see in the U.S., where we had a 12% growth in 2021, and we see that all business lines are growing, especially in SafePoint and the ATM business, and that is due to the outsourcing that is coming to us and to the market. And the same is and will happen in Europe. So then let's turn to the next page. These are the highlights of the quarter. I'll come back to some of them later in my presentation. What we see, first of all, that the Omicron variant had a limited impact on the Loomis business as we expected. We see that many societies have opened up. However, travel and tourism is still not fully recovered, but we expect that to come back this year and next year. Real growth was at 15% in the quarter, and we have the acquisitions in Finland and also in Switzerland that is supporting the real growth. Organic growth was at 11%. So we see continued improvements month by month, both in Europe but also in the U.S. Operating margin, if we then exclude Loomis Pay to make the comparison on an equal basis, it's at 12.1%. And the measures we took during 2020 when it comes to cost is now paying off. Operating cash flow at 73% of EBITA. If we then turn to the next page. The Board of Directors now proposes a dividend of SEK 8.5 per share and to compare with SEK 6 last year. During 2021, we have bought back close to 1.4 million shares, corresponding to a value of SEK 350 million, and that continued also in Q4. We have also issued some sustainability-linked bonds to a value of SEK 1.2 billion. And these bonds are linked to the outcome of a sustainability target to reduce absolute carbon dioxide emissions by 20% by 2025 and that is compared then to 2019 levels. We will also have a Capital Markets Day on the 23rd of March this year. Let's turn to the next page. On this slide, we see good illustration of how the margin has developed over time. We had a low point in Q2 2020 and have had a strong recovery after that. Note that Q4 is higher than Q3, which from a seasonality point of view is normally higher. So that's also an indication that margin is quite strong in Q4. So let's turn to the next page, and let's start with Europe and LATAM. Overall, a strong quarter when it comes to both revenue and margin. So when it comes to the top line, we see a real growth of 17%. And the acquisition we made in Finland and Switzerland are now integrated, and it's going very much according to plan. Organic growth was at 8%, and the positive trend we saw starting in September is now continuing into the fourth quarter and expanding month by month, and December was a really good month. The organic revenue reached 90% of Q4 '19 levels, which is an improvement by 5 percentage points compared to Q3. And as I mentioned, the highest rate of recovery was in December, which was a really good month for us in Europe. And we see now less restrictions in many societies and that will help further volume growth. We also, as I mentioned, will see that tourism and travel will come back during this year and 2023. Operating margin was also strong, 11.9% compared to 6.1% last year. And as I mentioned before, the cost-reduction programs which we took in 2020 are now really paying off. So we see that the flow-through from volume down to operating margin is happening. And we also -- we expect that the synergies from the acquisition in Switzerland will pay off in a positive result this year and next year, of course. Let's turn to the next page. And now over to the U.S. A very strong quarter again. When it comes to organic revenue, 13% plus. And in comparison here, the organic revenue reached 114% of Q4 '19 levels. We see also that the CIT and CMS business, our core business, continue to recover. And we saw high growth for these services also during the quarter. Continued strong growth for SafePoint. On new installation, it's on a record level for 2021, and we had 18% revenue growth during the quarter. And I'd like here to mention that we installed, in total, 10,000 or more than 10,000 SafePoints in 2021. And that is actually the target we put up at the Capital Markets Day already in 2017. So it is an amazing and fantastic result. And now SafePoint revenue accounts for 19% and of the total U.S. revenue. And we -- of course, with the installations we have made and the plans we have, that will continue to increase. Also, the positive trend we see around the ATM and ATM outsourcing is continuing. When it comes to operating margin, we see that, of course, the mix is helping us, so revenue growth from SafePoints and ATM are helping to support the solid margin. We also like to mention that in Q4, we had some nonrecurring effects, which is -- which was supporting the margin at that point in time. If so -- if you sort of wash that out, the margin was closer to 16%. However, we have some structural shortages of labor in the U.S. market. We are not the only one. I think that everybody struggles in that respect. We have, during these 2 years, focused very much on our service level towards our customers. And that has been our priority #1 and still is. And that's why, in this case, for instance, that overtime has increased. And we believe that these -- we are very convinced that these challenges are going to go away as we now have hired more people. We will also -- we're looking into the recruitment process even further and then also enhancing the remuneration to our employees. So I think that we have good hope that during this -- the beginning of this year that we will handle these challenges. Let's turn to the next page and talk a bit about Loomis Pay. We launched in October in Norway. And now, we are active in 3 countries in the Nordics: Denmark, Sweden and Norway. And in Norway, we are going to the market with a partner. We have spent quite a lot of time to further develop our product and service to make it the most attractive solution in the market, and we are on a good way to reach that target. We have also decided that Loomis Pay is now going to be rolled out in Continental Europe during 2022. So we're very much convinced that this is something for more European countries for this year. The ambition level and the cost level is unchanged. And so I don't go into that even more. If we then turn to next page, we have -- just as a reference, we have the P&L. So I quickly turn to the next page. And finally, I would like to say that we will host the Capital Markets Day on March 23. And of course, one of the focus areas will be to present the targets for 2022 to 2024 and, of course, some more information. And more information regarding the event will follow, and we wish all stakeholders warm welcome to the Capital Markets Day on the 23rd of March. So let's turn to the next page. And I'm through with my presentation. So operator, we now open up for questions, please. Thank you.

[Operator Instructions] And the first question is from Viktor Lindeberg, Carnegie Investment.

Starting with a few questions on cash flow. Buybacks, you have been executing in the past 2 quarters on buybacks, but nothing is announced now. And I think the balance sheet is in a very good shape. Can you comment a bit on why you have not continued?

The reason is that we have a Capital Markets Day coming up on the 23rd of March. So that's the factor. And then, of course, the intention is that the Board will go back to the AGM also to get the mandate to continue the buybacks. But this is the reason.

All right. On Loomis Pay, I was looking at the top line. It seems to be improving a bit. But the losses are also increasing. I guess it's a bit of a lumpiness depending on timing here. But can you comment on your expectations on Loomis and where you actually landed now in 2021? It's obviously a slight positive trend, but maybe should we expect an acceleration from these levels? Or how do you view the rollout so far?

No, that's right. Still, it's -- the numbers are not very high, as you say. But we are in a buildup phase. We're building up the sales organization. We also spent a lot of time and money to improve the product and the service. We also took some costs regarding the launch in more countries in Europe. So that is the reason why the costs are a bit higher. But on average, between the 2 years, there is not a big difference from what we have said. Of course, it's been a bit of a challenge to sell the concept in COVID times. But we expect that to become much, much better now as COVID and the restriction go away. So you should see an acceleration, of course, during 2022 when it comes to revenue in Loomis Pay, yes.

Okay. And on the '22 launch, you mentioned that also in Europe, and that costs in the SEK 100 million region are expected to be intact. Have you reprioritized the cost allocation on this? Or is it something that you had in the back pocket all along to launch outside of Nordics?

We have had that ambition and plan all the time. So that's in the plan. So that shouldn't change any of the circumstances, no.

Okay. And just to confirm, the target you set for 2025 of SEK 3 billion revenue is organic? Or do you foresee acquisitions in that number as well?

There could be acquisitions in that number. That could be that we look more on the technology side but also on the sort of what we call agents selling companies or sales companies, in that respect, to speed up that. So there could be a combination of both organic and acquisition.

Okay. And could you give us an understanding of how we should think about the proportion, the SEK 3 billion? Is it 50-50 then? Or would the acquisition be incremental to the SEK 3 billion?

No. I think that our -- so it's very hard to explain and give -- divide this in that respect. But I think that what you should think is that organic growth is, of course, the main component. That's how we thought about it. With that, we have our customer base. We have sales organization that we're now strengthening. And that combination, we go to our present customers to sell a solution in combination with cash. So organic growth should be sort of the main part of this SEK 3 billion, yes.

The next question from Johan Dahl, Danske Bank.

You talked about, Patrik, the sort of progress in your acquired units here, some expectations for 2022. Can you just elaborate a bit how far you've come and sort of what you're seeing in terms of profit improvement there in the coming year and 2 years?

That's right. So with the 2 acquisitions we made here are a bit different in the sense that Switzerland is more a bolt-on. So here, we're looking for synergies. We're looking for efficiency. And that is going very much according to plan. We are expecting good result or great result from that acquisition. And I think that from a margin point of view -- profit point of view, Switzerland will be one of the most important countries in Loomis the coming years. So that's one type. The other type is Automatia, which in itself is a very profitable ATM company in Finland. However, what we're looking for here is to take that knowledge, take that credibility, if you like, and expand into -- especially Europe with the ATM knowledge and take part of the outsourcing. So in that respect, it's a bit different. But both are, from a strategic and profitability point of view, very, very important for us.

The group margins at sort of the end of '22, is that a fair assumption? Or what would you say?

Sorry, I didn't get the question, Johan. Can you say that again?

When do you expect that the full integration and sort of the profit improvement will be entirely completed in the Swiss acquisition?

The Swiss acquisition is expected to be fully integrated at the end of 2022. So then you will have the full impact in 2023.

Excellent. And just a follow-up on the fuel surcharges. What do you perceive that the addition to organic growth was for the group for fuel prices here in Q4? And secondly, also you talked a lot about the increasing remuneration, improved processes for recruitment, et cetera. But the flip side of that is obviously on pricing. How has visibility increased for you guys in terms of doing price adjustments as we enter '22?

So I can start with the second part. We are taking price increases. So -- and that is going according to plan. And I think that the environment -- general environment, at least as we see, that is very understanding for the price increases. So there will be quite substantial price increases coming through here in the beginning of this year to compensate. So you shouldn't be worried about that. That is taken cared of, in control. And as you say, we now speed up background controls. We have centralized the recruitment and things like that in the U.S. to speed up even further when it comes to recruitment. So I'm quite hopeful or very hopeful that this will sort out -- be sorted out in the beginning of this year.

And when it comes to fuel, that's approximately 2 percentage points in the second quarter.

In fourth quarter?

In the U.S. Yes, 2% in the U.S.

In the fourth quarter, right?

Yes.

The next question is from Karl-Johan, DNB Markets.

Yes. Just to come back on the price increases. You feel that you're back on, say, par again coming into the early part of this year that you have, say, balanced the kind of challenge that you saw in half -- second half of this year with those increases.

Yes, that's right.

Excellent. I noticed that you saw a very good recovery also in the FX distribution and the international operation during the quarter. Is there something particularly happening there? Or is it just a COVID normalization on that side as well?

I think that the international business has been performing very well during the last 2 years. So that's a continuation of that. We have been very active in the market. And as you know, when there's a lot of unrest in the world, the international business is performing very well and has been doing so for quite some time. So we have 2 good, really good year in the international business: 2020, 2021. So nothing particular more than, as you know, the Ukraine crisis and things like that, that is helping the international business, if you like.

And on FX distribution?

No. In the FX business, in general, that's still on a low level. That's what I mentioned. We are waiting for tourism to come back. And that is still -- that is maybe the part of Loomis that has not recovered so much. So that's still to come. And when it comes, that's a big, big upside for us. And we very strongly believe that tourism and travel will come back here this year. So that's an upside from now.

So first signs of that's coming through basically. And you mentioned that you managed to reach the target of 10,000 installed SafePoints for 2021. Could you give us some idea of how big part refreshment rate in that number is and how much is net new placement? Is it this your...

No, no, no. I mean the -- it's about 2,500 refreshes and so on. So the net number is very, very high. It's between 7,000 and 8,000 SafePoint net new. So that's also a record number in itself. However, of course, we have physically put down more than 10,000 SafePoints. Some of them are refreshes. Yes, that's right.

Excellent. And also you did some changes to your M&A unit of having it as a special operation -- a special section on -- in your headquarters and putting it in under the CFO instead. Is that because you feel that there are less opportunities there going forward? Or how should we see it?

No, that's a good question. No, it's not. We have -- the M&A strategy is unchanged. I think that since 2017, we've done close to 20 M&A transactions, added SEK 3 billion to the revenue line. So we've been very active, and we continue -- we will continue to be active. It's a personnel change. And we are now putting M&A under Kristian here, the CFO, also to create a better, let me call it, synchronization between the different units, between legal, treasury and the different countries. So there is no, from a strategic point or tactical point, no change in how we look at M&A.

The next question is from Peter Testa, One Investments.

Three questions, please. One is just, again, on the U.S. labor question. You talked about the price increases and vis-a-vis wage inflation. The other aspect was just the availability of labor and overtime hours. Could you give some sort of sense as to how, say, overtime hours are changing as you started this year versus, say, the worst point of last year?

Well, overtime use has been increasing this year, for sure. And the reason is, of course, one is the labor shortage, which is a general problem or challenge, I would say, in the U.S. market. I think that many, many companies struggle with that. The second point is that we have prioritized the quality and the service to our customers. And that has been a priority. Safety and quality of service have been priority #1. And that is why we have been adding more overtime to really take care of our customers. So these are the 2 aspects. And as I said, we're doing everything we can when it comes to price increases but also recruitment measures to get fully staffed.

Yes. And my question was around that last point. The extent to which, as you centralize recruitment and taken more steps, can you give some sort of sense of what you've experienced in January in terms of overtime hours or when you would expect the overtime hours factor to normalize versus the peak of what you felt in H2?

Sorry, I think to clarify, maybe if you look into Q4 number of FTEs in U.S. compared with Q3, it is an increase. So we are able to hire more people. What has been impacting us most recently here in the latter part of Q4 as well is due to the callouts and that you need to stay at home when you feel sick no matter if you have tested positive or not. So that is one important matter for us is that you're easing up the restriction about to stay at home or not to stay at home and that we can see that this pandemic is, of course -- hopefully, we can see that it's fading out. That will be important for the staffing situation in beginning of 2022 in U.S.

Okay. So the overtime costs should come down as it really more related to COVID rather than recruitment challenges. Okay. That's clear.

Yes. Overtime, yes.

Okay. And then just a question on SafePoint Europe. If you could give any sort of update on the traction you've had given the emphasis you put on it and maybe some view on pipeline as you go into '22 in SafePoint Europe.

Yes. That's a good one. I think what we do now is to put a lot of emphasis on the top line in Europe in general and specifically also then SafePoint. So we're now doing a lot of efforts when it comes to strengthening the sales organization, marketing activities towards the customers and so on and so forth in Europe. And I think that we will see good progress in Europe when it comes to SafePoint this year. This -- now we can actually visit our customers, which is quite important in this respect. So I expect quite some step forward in Europe when it comes to SafePoint.

Okay. And the last question, please. If you just look at your new business in North America and Europe outside of SafePoint. So some of the initiatives like ATM, some of the outsourcing comments you had expected out of North American banks in your preparation branches. Can you give any sort of sense as to how the new customer flow has performed outside of SafePoint through as you exited '21 into '22 and just some sort of understanding of commercial momentum, please?

The momentum in the U.S. is very good. We have a lot of opportunities also outside SafePoint. One is the ATM business, which is growing quite rapidly. We see also that CMS and CIT is coming back. And I think that, as I mentioned many times, we will see increased outsourcing in both Europe and U.S. based on if -- that customers want to look for efficiencies but also COVID-related. So there's a very strong momentum in the business in the U.S., I would say, at this point of time. And I think that we could have grown even -- we could have grown even faster if we have -- we've been fully staffed, which we will be here in beginning of 2022.

Right. And so if you looked at new signings or volume of signings in CMS contracts, for example, in North America that's picked up now?

Yes, I mean I think that volumes are coming back. That's one. And then we have constantly customer discussions about new contracts, new services and so on and so forth. So there are a lot of activities going on right now, for sure.

We have a follow-up question from Viktor, Carnegie Investment.

I'm just curious to see how you think that Q1 may develop now in light of that Q4 actually came in a bit better than many of us expected in light of the renewed pandemic restrictions that, at the end of the day, didn't have that much of an impact. But now looking into Q1, basically, the levels are fairly elevated, and obviously, some restrictions have still been in place. So how do -- how should you think if you could give us any outlook for Q1 to sort of align expectations in the very short term, if there is anything we should be mindful of here?

I mean in general, we should see volumes coming back even further. We should see that. Now there are 2 elements here. The one is, of course, that society is opening up in general. And we've heard now that Sweden is announcing that they take away the restrictions. That's good. Hopefully, we'll see that in Europe during the quarter, and that will help the volumes. Then the question is can we get people to the business? Are people staying home because they're sick? That's the other one. And I think that the latter one is now more -- maybe more challenging than the first one. But in general, we should see improvement of the business going forward as society is opening up. And then the question is, the second part, how severe will that be when it comes to callouts, as we call it.

Okay. But [ you don't ] agree that maybe the callout issue is a bit more of a Q1 phenomenon than Q4.

Yes. Well, callouts are getting better. We're getting that under control. We have less callouts. So -- but that's very volatile. But all in all, we're very -- we're optimistic as we write in the report about 2022. And if restrictions go away as they do now, we think we have a good 2022 in front of us for sure.

Okay. Just coming back on Loomis Pay. Is there any KPI that you could share with us, either installed base or momentum on interactions or conversions from sales reps there, et cetera? That's my first question on Loomis Pay. And second, I noticed that you provide this 2-year contract, that the first 2 quarters are, call it, for free or so. And hence, maybe revenue recognition is very artificially low the first 2 quarters of contract wins. Is that the way it is recorded in the P&L as well? And is that something we should be mindful of in the growth trajectory here?

Yes, that's right. That's a practice in this part of the industry that you -- to gain customers, you offer a rebate or that they can get a couple of months for free or whatever. That's quite normal. And of course, that is, to some extent, hampering the volume in the beginning of the contract. So that is, for sure, and that's why I say it's going to be escalation of the volumes as we move forward -- escalation of volumes and revenue as we go forward. So that's -- and that is quite normal. That's how we do business in this part of the industry. The second one is when it comes to targets and so on, let me -- let us come back to the Capital Markets Day in March, and we can talk much more about Loomis Pay and the different angles to it and so on. But let's wait until then, so a couple of more weeks, and then we'll talk more in detail about Loomis Pay.

Yes. All right. Final from me on the SafePoint concept in the U.S. that you have multiyear contracts on now, which is obviously very beneficial and stable. But how should we look upon this contract in more than inflationary environment that we see now, if it's sort of fixed monthly subscription price when you have cost inflation in your business that would, all else equal, lead to margin erosion for SafePoint. But do you have any clause in place for these contracts as well that protect you? Or how should we think about these longer-duration contracts?

Yes. The short answer is yes. We have -- if needed, we can increase prices in these contracts as well. So that is not -- that's not -- we're not locked in for like 5 years or 4 years or so on. We can increase prices that we can.

The last question is from Daniel Thorsson, ABG.

Yes. I have a question on the European margin that was strong in the quarter. Can you say something about the country-specific development here? Is, for example, U.K. back to the same or lower or higher margin versus prepandemic given the large cost reductions you did there? Or which are the other countries driving the margin increase here in Q4?

I mean the big countries, of course, like Spain, France, Switzerland, are driving the margins. Of course, those are big. But in general, I think that all our countries are picking up. There is still, in some countries, some more work to be done. But of course, to get to the margins we have, these are -- it's the big countries that need to perform, which they did in Q4.

And are the current cost levels sustainable? Or do you need to invest a bit more in Europe as well as we see volumes coming back in tourism and traveling coming back as you talk quite a lot about here?

We don't expect that. I mean of course, if volumes increase in certain places and we're not fully staffed or need to add more white -- sorry, blue-collared workers, of course, that -- but that's variable. But the low -- I would say the low structural cost base we have now should be remained. We've taken out a number of branches, vehicles and, to some extent, people -- or to a large extent, people as well. We should expect that, from a structural point of view, to be on this level, yes.

There are no further questions. I would like to hand back to Mr. Andersson for some closing remarks.

Thank you very much for listening and very good questions and looking forward to talk to you all again on the 23rd of March. Thank you very much.