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

Good day, and welcome to the Loomis Q2 '22 Report Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Aritz Larrea. Please go ahead, sir.

Thank you very much. Good morning, everyone, and welcome to the second quarter presentation for Loomis. My name is Aritz Larrea, and I'm the new CEO of Loomis. And with me here today, I have Kristian Ackeby, our CFO. I will give a short overview of the second quarter and then open up for questions. Let's start the presentation by turning on to the next page. Here, we have the disclaimer, which is an integrated part of this presentation, including the Q&A. I want to highlight that we're using some non-GAAP measures to facilitate the analysis of the group's performance, and you can find the explanations and reconciliations in the interim report. Let's turn on to the next page. Loomis is at the center of the payment ecosystem, and our services are essential for society. We have a complete product offering that covers the need to handle in-store payments. This allows the merchants to focus on their customers and increase sales. Let's turn on to the next page. It's encouraging to see consumers back from pandemic lockdowns. More difficult to find a table at the restaurant, but confidence is back, and people want to make up for the lost time and travel again. We see more and more discussions around the importance of granting accessibility to cash. It provides options for people with limited or no access to digital money, making it crucial for the inclusion of socially vulnerable citizens. Despite the current economic uncertainties, we keep seeing volumes increasing and tourism is not showing signs of slowing down so far. Retail keeps increasing despite surge in prices, and we still see a resilient consumer who continues to spend despite the headwinds of rising inflation. Although, we don't have a direct impact on Loomis from the Russian invasion of Ukraine, we do see specific supply chain issues that have impacted our business, which obviously could delay our efficiency programs, both from a financial and environmental point of view. As we have proven before, Loomis has a strong history of navigating macroeconomic and geopolitical uncertainties since the basic need for cash and payment solutions is vital in our society. Let's move on to the next page where we have the highlights for the quarter. Let me start by emphasizing that when it comes to revenue with SEK 6.2 billion, this has been the best quarter ever. This is mainly supported by strong organic growth and favorable currency movements. We gained from the fact that we are a global company with the majority of our business denominated in other currencies than the Swedish krona. Organic growth was at 16.1% in the quarter. As I mentioned, open societies and increased travel have supported our growth. It has been our third consecutive quarter with higher organic revenue than pre-pandemic. When it comes to the operating margin, that was at 10.8%, excluding Loomis Pay. We see that increased volumes and the efficiency measures initiated during the pandemic are already paying off. Operating cash flow was at 104%. Despite the increase in accounts receivable due to our strong growth, we have been able to offset that by reducing our cash stock. And last but not least, we continue with our buyback shares program. We have already repurchased 884,000 sic [ 824,000 ] shares in the second quarter, and the Board of Directors has approved additional buying of 200 million for the third quarter. Let's turn to the next page. Here you can see how the margin has developed over time. We had a low point in Q2 2020 and had a strong recovery after that. We have improved our operating margin by 1.2 percentage points, which brings it up to 10.8% in the second quarter this year if we exclude Loomis Pay. This should also be viewed in the light of headwind we are currently facing with cost inflation and supply chain issues. Turning to the next page and starting with the segments. We first start with Europe and LatAm. The positive trend in Europe and Latin America continues. We have had a strong quarter of revenue and margin wise. Regarding revenue, we're slightly above SEK 3 billion, and we had organic growth of 16.8%, with strong development in all European countries and a clear signal that the FX business is back. The operating margin is at 10.3%, supported by the increase in volumes. In addition, the work on optimizing the infrastructure is paying back. Integration of acquisition in Switzerland last year is according to plan and expected to be completed by the end of the year. Turning on to the next page, and focusing on the trend of both revenue and margin. We see that total growth was at 22.5% while looking at the top line trend. The positive change started in mid-2021 and continued into the first and second quarters this year, expanding month-by-month with a strong recovery in our main markets. Regarding the operating margin, despite the impact of inflation and supply chain issues, we have increased it by 4.3 percentage points year-over-year, bringing it up to double digits. The strong revenue growth, together with the efficiency plans we have in place has allowed us to make such improvements. Let's turn to the next page over to the U.S. The strong momentum continues in the U.S. business. Revenue was at SEK 3.25 billion with our recurring revenue business representing close to 42%. Organic growth was at 15.7% in the quarter. We must remember that we are comparing to all-time high revenue in prior year. SafePoint grew by 21.8% and now accounts for nearly 20% of the U.S. revenue. When it comes to the operating margin, that was at 13.2% in the quarter. As mentioned in our Q1 presentation, we have had structured labor shortages in the U.S. market and supply chain issues that have temporarily impacted our margins. We have focused on capturing the growth opportunities, but with a temporary negative impact on the margin. We see improvements in the labor situation in the U.S. and now it's a matter of time to get all the people trained and focused on keeping providing high-quality service. Turning on to the next page and focusing on the trend of both revenue and margin. We see the exceptional U.S. business revenue trend during the last year. We had a high FX impact that reached all-time high revenue figures in local currency. It is important to remember that during the pandemic, Loomis U.S. only showed a negative organic growth in the second and third quarter of 2020. We keep working on efficiency, and although the supply chain issues we suffered have impacted our efficiency plans, we expect the margin recovery in the second semester of the year as we already communicated in our Q1 presentation. Let's turn to the next page and talk about Loomis Pay. We're moving ahead with Loomis Pay, building the sales organization in the countries we have launched and those are Sweden, Denmark and Norway. We're investing money, time and effort into the Loomis Pay platform. It is state-of-the-art, both hardware and software wise, and the customers' reactions are very positive. It is also promising that we are seeing a significant increase in transaction volumes. We have started piloting the solution in Spain, country with great potential in the SME market. Just as an example, there are more food and beverages SMEs in Madrid than in all Sweden. We expect the launch in Spain in the second half of the year. Turning to the next slide, we see our continued initiatives for the sustainable business. We continue lowering Loomis' carbon footprint and dependency on fossil fuels by introducing more sustainable vehicles and optimizing our routes. We added new electric vehicles on the road in the second quarter, despite the supply chain issues. We also carry on our cleaner energy with higher efficiency proposal, introducing new solar panels in some of our main branches in Spain. And last but not least, Loomis has issued sustainability-linked bonds that amount to SEK 600 million linked to CO2 emissions. Let's turn to the slide with the income statement. Here, we have highlighted 3 specific items that impact our income before tax in this quarter. In total, these items amount to SEK 110 million. And moving on to our last slide, I just wanted to summarize what we have been presenting. To summarize, we have had the highest revenue ever and highest operating profit for second quarter. We've had great organic growth in Europe and in U.S., where we were comparing with all-time high numbers last year, and we had a significant increase in our operating margin year-over-year despite the challenging market environment. I'm through with my presentation. So operator, we can turn on to Q&A.

[Operator Instructions] We will now take our first question.

Daniel from ABG. Can you hear me?

Daniel, yes.

I have a question on Europe here. You said that the European organic recovery continued month-by-month during the second quarter. Can you say something on how the quarter ended in June versus 2019, levels and also the start of July. And kind of your expectations for traveling, tourism activity in Europe around July and August, the signs that you see. I guess it's reasonable to continue to see the organic recovery versus 2019 levels to continue to increase really near term here.

Yes. So I think we had a good momentum. And currently, we have no reason to believe that we should not continue to record good growth that in the first place. And I think it's probably time to stop comparing ourselves to pre-COVID and focus on the future and our targets for the strategy period for the group.

Can you say something on the regional development in Europe? What do you see here? Do you see any growth year-over-year in the Nordic market, for example? And how has U.K. developed really recently here? We know that, that has been tough.

Yes. I mean it's good to see the ongoing discussions around availability and acceptance of cash in the Nordic countries. It has been a second consecutive quarter with organic growth in Sweden. So that's great. And when it comes to the U.K., and that has been one of the questions that we have received in the last quarters. It was one of the countries with the toughest shutdowns during the pandemic, and it was also the country where we did perform the most comprehensive restructuring to continue to have efficient operations. During the quarter, we've seen strong organic growth when the society in the U.K. opened up. And in addition, we still see a lot of outsourcing opportunities in that market as well.

My final question is on the U.S. and the U.S. margin. You said that we should expect it to come back here in the second half of the year. Is it really reasonable to expect it to come back to the high levels we saw around 2020-2021 in the next, like, 2 years or so?

As we said, I mean, now we've been impacted by the higher salaries that we have and the labor shortages. We see that there's going to be a gradual improve, as we already stated in our Q1 presentation. So we do expect to be -- to recover that margin. When it comes to the levels of margin in the future, we stick to the Capital Market Day's targets since we don't specify per segment. Its 12% to 14% margin is what we expect as a group and, of course, we've tried to get into this bracket as soon as possible.

We will now take our next question.

Viktor Lindeberg from Carnegie. A few questions from my side. And starting on, if you could sort of provide an approximation on price versus volume when looking at the organic growth both in Europe as well as in the U.S. Second, also if we look at the high inflation environment in Turkey and also Argentina, how much of an impact did this hyperinflation have to the organic growth rates in Europe? If you could help us sort that out.

Yes. I'm trying to talk separately about both segments. Starting with the U.S., we've got volumes, price increase and the fuel fee. I think all 3 areas contribute to the growth. Regarding price, short-term increases are mainly to offset salary inflation since fuel is charged separately. Fuel and wages are approximately 50% of the cost structure. Fuel costs have increased from 3% to -- 3% of the revenue to 4%. So that gives you an indication about that number in the U.S. And taking these 2 into combination, volume is still an important factor in our growth. That's talking about Europe, if we talk about -- sorry, talk about U.S. If we talk about Europe, we've always explained that there is a lag in price versus cost increase. But over time, our price increase will compensate the cost increase that we had. And that's what is impacting our margins temporarily. Regarding the hyperinflation Turkey question...

Yes. When it comes to the hyperinflation and the impact sort of the revenue side, you can assume that our business in Turkey and Argentina combined is somewhat more than 3% of our business. So with an inflation if -- and I don't remember exactly the inflation number, but if the inflation would be 50%, then it's 1.5 percentage point.

And looking at your comments on the U.S., you've had margins coming down a bit as you're investing in growth and also the staff deficit and extra hours that you're putting in right now. But could you sort of give us an indication how you view this gradually improving throughout the second half? Or is this maybe more a 2023 event when looking at more stabilizing or margins coming back to the 15% level that we used to see before going into this slowdown that we have been -- experienced now over the past 2, 3 quarters here.

Yes. So as I said before, I mean, I see a gradual improve. So there's going to be a small improve in the -- this second semester of 2023 -- 2022, sorry, as we said before, and that will continue upwards in 2023 as well.

Final 2 from my side. Looking at the U.K. revenue that you actually report separately in the report and also Sweden. When just comparing to 2019 levels, I think the U.K. is now at about 72% of -- on the 2019 levels when looking organically, give or take, 70% to 75%, depending on what FX you put in. And Sweden is actually almost at 90%, so not far from the aggregate of Europe. However, my question here is, looking at the cost efficiency or cost takeout you made during the pandemic, would you say that you managed to maintain margins or maybe even improve? Or are you structurally lower now in the U.K., for instance, in terms of margins given cost -- fixed cost part of the business and also being more or less CIT business or how should we think about these countries?

So as I spoke before, I mean, we did the restructuring work. And I think we did a great job there to make our operations more efficient. Margins are gradually getting better as well there. We had a big, strong organic growth this quarter as well in the U.K. And I don't see why that should change. I mean, we still see margins gradually improving there. And the only thing is, we are seeing certain countries in Europe being affected already by labor shortages and supply chain issues as we did see in the last year in the U.S.

[Operator Instructions] We will now take our next question.

Karl-Johan Bonnevier from DNB Market. Excellent extra comments on the different European markets. But I would love to hear your view on France and how that organization now is coming through after the joint -- merger with Prosegur's operation. And is everything in place? You can really harvest, say, the market coming back?

Yes, yes, everything is in place. Volumes are coming back as well. We had a strong revenue in France this quarter as well. Everything is as projected, yes. No, no issues there.

And taking your knowledge about France, obviously, the FX business, the FX distribution business was a big component before the pandemic. And now with tourism coming back, is there any reason why that shouldn't recover to pre-pandemic levels, you think?

No reason. We've seen a significant organic growth in our FX business, and it has impacted directly our margins as well. So no reason for that not to go back to pre-pandemic levels.

And obviously, during -- in the midst of finalizing, I guess, the merger of the operation in Switzerland, what is your take on what we have created there for you at this stage?

As we've said in Switzerland, it's according to plan, and we have added a lot of value to that Swiss business. It was a great acquisition, and we've demonstrated that we came up with huge synergies in the country.

And when do you think the synergies could be fully realized already during this year? Or is that the question for 2023?

Probably -- I mean, we're planning on finishing this year, but we might end up first quarter 2023.

And when you look at bringing now Loomis Pay into Spain, maybe taking your knowledge from the Spanish market, how do you see that kind of platform fitting with the Spanish operation. And what kind of, say, momentum would you expect for it when you go for a launch there? Is it something you could -- would expect a quick take-up of or would it be similar to what we have seen in the Nordics, you think?

So we strongly believe that the Loomis Pay will complement our current portfolio and strengthen our competitive position with unique proposal for our customers. We already see transaction increased volumes, which is the important driver for the revenue longer term. Of course, this will be supported by Spain as a large country. I already mentioned that just looking at the food and beverages SMEs, there are more in Madrid than in all Sweden. But we should not expect to have a significant impact on revenue during 2022, I mean, for the Span...

But if you look at the market opportunity, do you think it's and say -- shouldn't say easier sell in Spain than it has been in the Nordics, where you might have even more, say, consolidated footprints when it comes to digital payments and similar things?

I think that cash being so strong in Spain, we will leverage that position that we have in order to gain that digital side of the business as well.

And one final for me. When you look at the U.S., and obviously the labor shortage and the inflation you've had in the operation there. Going into the second half and you're still saying that you are seeing good volume growth. It sounds like you are taking market share and getting, say, the new structure in place, getting the employees online. Do you see an opportunity to continue to take market share?

It's a big opportunity. As I said before, I mean, we're getting staffed. Now it's about training the people. But the most important thing in the U.S. is to provide high-quality service. And I think we're there while others are struggling more. So yes, there's a huge opportunity there to keep growing.

We are now taking our next question.

It's Peter Testa, One Investments. A couple of questions, please. Just on the U.S. side, can you give a sense on the labor. Are you seeing staff turnover come down or is it really your gross hiring rate has picked up to try to stabilize this labor situation and overtime situation?

I think the turnover has stabilized, and it's just about having more people and training them. But I wouldn't say that the turnover has gone down. I think it has stabilized.

So your gross hiring and training and absorb. And then when you look at the -- your point on going for growth in the U.S., can you give some sort of sense as to what may be happening in terms of pipeline conversion, especially on the CIT/CMS side or bank outsourcing? Because, obviously, SafePoint is going great, but just on the other parts of the business where it's harder for us to see what's going on. What are you seeing in terms of pipeline build and pipeline conversion?

I think we already stated in our last Capital Markets Day that there's still room for growth through outsourcing in the U.S. market. When we look at the global cash management market, it will continue to grow at a compound annual growth of more than 6% from SEK 20 billion that it was, I think, in 2021, to SEK 26 billion in 2026, and more than half of it is CMS. So we are already seeing the outsourcing from commercial banks and retailers increasing, but it should get even better.

Then just to know whether you had seen some sort of improved rate again during '22 as it come out of pandemic and people focused on doing normal business? Or i.e. has there been an acceleration in that path versus the last 18 months? Or any other comment?

There's no other comments there.

And then the other question was when you look at your experience in the U.S. and bringing that back to Europe on SafePoint and thinking about what you would prioritize to bring SafePoint growth up in Europe or where you see steps you need to take to improve that opportunity? If you could talk a bit about that, please?

Yes, sure. The SafePoint business in Europe is growing. However, when we compare the numbers, we will not see the same fast development in Europe as we see in the U.S. where most SafePoint customers are new customers. In Europe, the outsourcing process of cash has started earlier and most merchants are already Loomis customers. We think we will see improvements in margins there, but not a boost in revenue when it comes to SafePoint. Now in Europe, we do have other automated solutions like recyclers and front office machines, and we do have a great expectation there on how that would work in the U.K. market.

Do you see any particular markets in Europe, which are growing faster than others in that regard?

We do not provide information by country. It's just that we've been strong in Europe, and that's all we can say.

And last question just on M&A. I mean, given you're coming into the role of CEO, any particular comments you would make on M&A as a priority versus what's been a continuing push on organic?

Across M&A, I mean, it differs by segment. But we think M&A is going to be crucial in this strategy period. When we talk -- we got like 3 blocks, so one would be the core business. We will focus on those countries where we are already present or close to. In the adjacent business, it's complementary and expand our product offering and reinforce certain areas, that would be our strategy. And then when it comes to Loomis Pay, we would need to be a bit more active in M&A since we -- the idea there is to gain speed and time when launching in new countries.

We will now next take our next question.

This is Suhasini from Goldman Sachs. Can you hear me, please?

Yes.

I just have a few questions on Loomis Pay, please. It's good to see that the transaction volumes are picking up and you're expanding into new countries. But is it possible for you to give us some color on the business model dynamics here? Is it monthly fees plus transaction fees and therefore, as the transaction volumes pick up, we should expect a sequential acceleration on Loomis Pay revenues? And who do you see are the key competitors here, please? Is it likes of the Square, Block, et cetera or somebody else? And do you need to get licenses from each country before you operate here? And maybe just to help us -- help me understand a little bit, what is the business reason why a retailer would choose you and Loomis Pay? Is it access to better technology or lower cost or maybe a combination of both?

I think I can start with the last one first. I got a lot of questions there. I don't know if I got all of them. But the last one is, why would the customer choose Loomis? I mean, we are experts when it comes to payments, and that includes cash, which not all the tech companies can offer. So we offer a bundled solution of cash and digital. And that's also a way of being a bit more cost effective for the merchants. About specific targets for Loomis Pay, we do not have any specific external targets for Loomis Pay, as we already explained on our Capital Markets Day.

Sorry, not targets. I wanted to get some color on how does the business model work, please? Is it monthly fees plus transaction volume?

Yes. So it's -- when you look into the Loomis Pay model, it is subscription and transaction fee model. So it's the -- it's what you usually see also with competitors. I can recommend that you look at the webpage, loomispay.se, I mean, that's the Swedish page, but you can change it to English. And then you can see how it is presented to the customers as well. So transaction fee is an important part of the future revenue. And also when you look into the sort of the license to move to other countries, our license -- we have a license that we can passport to other EU countries, and that is what we have done now. We are passporting our Swedish license to Spain. So that is how we operate within Europe.

We will now take our next question.

Viktor from Carnegie again here. And some -- actually some questions were answered. But on the SafePoint rollout in Europe, you mentioned it's not maybe being deployed as fast in the U.S. However, could you provide us with some numbers here? What you've seen in the first half of this year when it comes to deployment? I mean, you've indicated approximately 9,000-10,000 safe boxes they're installed as of year-end 2021. And sort of where you are right now could be of interest or where you see your plans going in 2022? And also looking at Europe as a market, structural differences versus the U.S. on, I guess, especially costs related to employment, given how flexible you can be in the U.S. as a customer with manned hours versus more monthly contracts for employees in Europe. So would you say that there is a different bang for the buck for the customer that makes the choice harder for choosing SafePoint in Europe? That's sort of the first 2 questions. So looking at the quantification of SafePoint and also the potential structural hinders or difference there?

Yes, I'm answering the second one. I think it has to do more with, as I said, with how in Europe the outsourcing of cash was primarily earlier in the U.S., that's the main difference. So what happens today in Europe is that those merchants are already Loomis customers. So the only difference there would be by shifting them to the SafePoint business to be slight improved in margin probably and a long-term contract with them, that would be all. But there's no other difference between the U.S. and the European SafePoint solution. When it comes back to the labor cost, I think it's exactly the same. I mean, we operate in all countries with a cost per hour for our people, and that's why we try to be as more efficient as we can by rerouting and all these different...

Yes. No, I was more thinking of the customers -- customers' cost, their flexibility in their OpEx that may affect their decision to go for SafePoint or not.

That affects their decision, but both in U.S. and in Europe, in both cases, and there's other things. I mean, you've also got the capacity of having the provision of credit, which is very appreciated by a lot of customers as well. And then one thing that affects with both regions is also internal theft. And that's something that also worries our merchants. So those are the things where they could get an advantage. And finally, if we consider all those, we're also talking about cost reductions in the long term.

And on the rollout plans for this year, are we looking at the 1,000 or 2,000, 3,000, 4,000 units of deployment? What's your gut feeling or best guesstimate?

It's a relevant question. The thing is, I started as a CEO in May 23, and this is my first quarterly report. I know Loomis, but some of our business that I need a little bit more time to get fully acquainted with. Let me come back later with that.

And finally, from my side, maybe a question for Kristian related to Loomis Pay, if you could give us any indication on the breakdown in Loomis Pay on the transaction fee versus monthly fee. And obviously, you can scale the transaction fee going forward more, but any split or help that could help us model this would be highly appreciated here.

No, we are not providing that split externally. But we -- I mean, the reason we are providing the transaction volumes is that we believe it's beneficial to see how the long term can impact so to say. Also if you look into our revenue, even if I understand it has been smaller numbers and you put that into relation to the transaction fee we have shown, you can see a correlation there over time.

[Operator Instructions] We will take now our next question.

KJ from DNB again. Just interested to hear when you take Loomis Pay into Spain, is there a lots of need for local customization to get the system to work, looking at payment structure and so on? Or is it a pretty standard process to take this platform into a new country?

Yes. I think it's a combination of both. Most of it is standard, but then you always have specific ad hoc things that affect the countries. But mostly, it's also -- already standardized.

But the majority of the system you feel is transferable between geographies in a quite straightforward way.

Yes. Yes.

And just to get a little better feel for the underlying dynamics between this -- all these business lines that you are showing. For the moment, you seem to be having a much higher growth in CIT than CMS. Is that some sort of lagging effect that is going to come into the CMS operation? Or how do you transfer for those kind of business dynamics between them?

I think the impact that you're seeing when you compare the second quarter this year to the second quarter last year is that we have a lot of recovery, especially in the European region, and that makes the CIT higher. But it's just due to that we still see the recurring revenue increasing in both areas.

And one final, I'm just curious. Looking at the couple of your competitors, they seem to have had a much bigger problem placing new kind of -- of these kind of smart safes in the market. Is there any change to the dynamic you see in the market? Or is it that more is a company-specific problems on their accounts?

We don't talk about our competitors and how they're doing. We've had -- we've got a good product that's all I can say, and we offer high service quality. And that's what it's always been about Loomis. So that's all we would say.

But no real change in the market dynamics or how you go to market now maybe compared to how it was 1 or 2 years ago?

No.

[Operator Instructions] It appears there are no further questions at this time. Speaker, I'd like to turn the conference back to you for any additional or closing remarks.

Okay. Thank you very much for listening in, all great questions. I wish you all a great summer vacation. Bye.

This concluded today's call. Thank you for your participation. You may now disconnect.