StrongPoint ASA (STRO) Earnings Call Transcript & Summary

Hello, everyone, and welcome to StrongPoint's Q&A session following our Q4 results. My name is [ Theon ], and with me I have our CEO, Jacob Tveraabak; and our CFO, Marius, to answer your questions. [Operator Instructions]

As we have some questions that have been sent in already, so first of all for you, Jacob. Obviously it's been a tough quarter. Do you have any additional comments to the fourth quarter?

Sure. Yes. I mean, clearly this is a weak result that we're not very happy about. The -- it should be said in the quarter though, that there are -- it is very, very rare that we operate with the one-offs. But there's actually -- this quarter, we actually have some one-offs. One of the one-offs, just wanted to get it out there, has been the restructuring costs following the announced cost reduction that we -- that we have been going through now in Q4. So as of January 1 this year, we'll be having a cost base of NOK 20 million less per annum than we had earlier. And of course there are some severance pay and restructuring costs following that, in the order of magnitude of NOK 7 million. And then we've had internal write-down of both an IT system as well as some inventory. So -- whereas the results are not good, there are some explanations for why they end up where they did. That said, even without these nonrecurring items, we are ending up at slightly negative and obviously not where we want to be. So as an investor, of course, you're asking yourself, well then, what -- why is this happening, right? And I think we're right now seeing the effects of, on the one hand side, at least a delay or halt in investments by investor -- by grocery retailers, whilst on the other hand we are investing in very significant breakthrough customers, of which we have only to date been able to announce one of them, namely Sainsbury's. So we believe that it's the right kind of investments to do, although it hurts us very much also in the short term.

All right. Thank you, Jacob. The next question I'll direct to you, Marius. Why are you not paying dividends as you have been doing for so long?

Certainly. So this is a combination of a few things. I think, first of all, we have received a covenant waiver from our bank until the fourth quarter this year. This will ensure that we will not reach our covenant for the next quarters. And while having a covenant, it is not possible for us to pay dividends. Moreover, we've had obviously a challenging financial performance in 2023. And finally, and perhaps most importantly, we have to prioritize the -- and complete the ongoing commercial investments, which will generate future revenue.

All right. There's one more question here about the nonrecurring items that you mentioned as well, Jacob. The question is, can you talk about the nonrecurring items in Q4?

Sure. I think Jacob touched upon it. It consists of two major cost items. It's the severance pay and the M&A costs. Both of these were completed in the fourth quarter with the additional restructuring costs. And secondly, obviously, as a project-based business, we have had some pressure on the inventory levels, i.e., we have done a write-off on certain parts of the inventory. And there was, as Jacob mentioned, an IT infrastructure project, which has been fully written off in Q4.

All right. And there is one question here, Jacob, about, obviously a tough quarter, but what were you most happy about?

Well, I mean in isolation, I mean, obviously, the revenue growth that we've seen in the Baltics and Spain with 22% and 35%, respectively, is something to be happy about. That's where we want to be. But I think maybe even more so is the underlying traction that we're having that we cannot yet show or reveal, I would say unfortunately, to investors. But those are some of the -- both major projects that we have been talking about in the past. We have the Iberia project and others, but also the buildup of an organization both in the U.K. and in Spain to enable us to really grow into these areas where there is so much potential for us both in the medium and longer term. I think that's -- those are the things that makes me more -- most proud of in the Q4.

All right. And you mentioned in the quarterly presentation that there has been a challenging market. Can you comment on the current market and outlooks?

Sure. I mean to a large extent we experienced being hit by the grocery retailers investment hold. I mean, we've said before and I'll be happy to say again, I mean the grocery retail industry as such is a resilient industry. I, at least, have yet to hear about any grocery retailer going bankrupt or being in any such shape, right? And we don't really have any losses on accounts receivables as an example. But that said, we're seeing grocery retailers holding back investments and they have been doing so for many quarters now. I both believe that the investments will come at some point in time, regardless of how the macroeconomic environment goes or if it's the same as today. But obviously, also with improvements in the general economic climate, inflation coming down as an example, is going to be helpful in general for us. So, difficult to say that there's an immediate switch now that we just changed year. It will have to come and will come at some point in time. And regardless, right, we have very solid customers that are not just willing to, but sort of have to invest in technology going forward. That's part of the solution of staying ahead in the industry.

All right. Thank you, Jacob. We have a three-folded question that has been sent in now. I think I'll just take them in order. The first one is the USA pilot status. I guess they want to have a status on the U.S. pilot currently ongoing for you, Jacob.

Okay, sure. So U.S. pilot, I mean that's the Click & Collect Locker pilot that have been ongoing for quite some time. I'll be very careful about sort of making any kind of promises, but let's put it like this: we wouldn't be keeping on a pilot and having that on unless we were positive about the outcome of that. We have to respect these are significant grocery retailers. And as we've seen in the case of Sainsbury, these kind of maturing of the client and investment decision and ink on paper takes time. It has taken time already in the U.K. -- U.S., sorry, but I'm still positive about how this pilot will be unfolding over the next few quarters.

Very good. And the second question sent in here is about the Iberia order. You've said several times that it's very soon something is coming. Can you give a bit more -- or give an update on that project?

Yes. I mean, I completely understand the market questions for the -- regarding the Iberia order. Those of you that have been following us would recognize that last year, when we did the strategy update session, we had the unfolding of full cash [ vault ], now labeled CashGuard Connect. And we honestly believed that we would start the pilot in store during Q3. Obviously, that didn't happen. There's been a number of predominantly internal reasons for why that hasn't emerged. This is a product development jointly with a very significant customer, and it takes time to ensure that we have the performance that both we and the client is happy about, but I'm absolutely certain that we will get there as well. So I'm not going to tie myself to a sort of timeline without sort of saying that we will be seeing and communicating something which I believe is going to be absolutely very well received and revolutionary in the cash management market in not too long.

Very good. And I'll see at the questions here. There's one question here regarding Pricer ESLs in Finland and U.K. Asking, is StrongPoint the only supplier of Pricer ESL in those two markets?

Well, first of all, I think it's a question to Pricer. But from what we know, we are the only supplier of Pricer ESLs in Finland. In the U.K., which is such a big market, I'm actually not sure about the very latest status. Clearly, when you have very big customers or potential customers, Pricer's themselves are also involved. But we are certainly the most preeminent and most significant partner in both these two countries as well.

Okay. And I think the next one should go to you, Marius, also with a couple of questions in the same message here. But first of all, what is the chance of breaching the loan agreement and a follow-up stock emission, you reckon?

So obviously we cannot speculate in either of these two. We appreciate the question. What we can say is that we will work quite hard to stay and remain within the covenant reporting, which again starts in Q4 at the end of this year. It is important for us to complete these investments that we have spent so much time on. As far as a share issue, it's not something we can comment on specifically, and that's a question that is reevaluated if commercial opportunities come up or any other events from that perspective.

Okay. Thank you. And see, the Iberian deal has already been answered, so I'll skip that one. And the next question, also to you, Marius, when will we see revenue of the Sainsbury's deal?

Certainly. So this is coming back to being a pure software deal. And with this kind of project, especially with this one, which is a significant project for us, there is new functionality to be developed. There is a need to onboard, not only from our side, but also to have a successful customer success team on the customer side. So to answer more specifically, this will be -- there will be revenues in 2024. There is a need to plan and roll out the current service for the next 6 to 9 months. And then when this has been done, there is obviously, as with any other major software rollouts, a need to have time to be fully onboarded once we start to roll out the software. And then obviously it's a matter of the number of transactions, et cetera, that will materialize from 2024 and really create a visible pure software-related recurring revenue for us going forward.

Maybe just to elaborate on that just a bit on what you're saying, which is of course 100% correct, I mean, as this is a significant project to be rolled out, fortunately we also have some professional services revenue. But of course, that's not the reason why we did this deal. And the deal itself is very both important and profitable for StrongPoint. It sort of gives back on the investments that we have been doing for many, many years. I do also want to put on the lenses of just looking beyond quarters and maybe even 2024 is the fact that this is the first solution we're delivering to Sainsbury's. And if we believe that we will be able to serve Sainsbury's in the same way that we have been serving other grocery clients over many, many years, there should be a lot more potential. I'm saying that both because some of the solutions we offer communicate together. One of the very evident one is the sort of electronic shelf labels and the pick-by-light combined with order picking. It's a very natural and value-adding service or solution for the customer. And also because that when we look at the number of solutions we have been providing other -- across the retailers over time, that's not one, but actually it's 4.7. So if you take the top 10 grocery customers we have today, we serve them on average 4.7 -- with 4.7 solutions. And that obviously should and will be the aspiration also for Sainsbury's over the years to come.

All right. Thank you. Let's see. There is a question here regarding AutoStore, simply saying AutoStore update. Do you have anything to update on there when it comes to that product area, Jacob?

Sure. I think in terms of AutoStore, we are now finally putting in place the last touches on the software and the test runs of the Helgeroa frozen -- or 3 temperature zone AutoStore, obviously there with frozen capabilities. That will be, first of all, magnificent for the customer, and secondly also a true testament for what we're able to deliver. So I have high hopes that the first frozen AutoStore solution will also gain interest with other customers elsewhere. So that's one. And then secondly, as I said earlier, as we're gaining -- or building organization, gaining traction on the client discussions we're having both in the U.K. and Spain, we're sort of seeing a nice pipeline sort of building up also for AutoStore here. So we'll obviously get back when we have something concrete, but I'm sort of positive about the general outlook for how that will turn out.

Very good. I see there's coming quite a few questions here. The next one here is regarding Finland. We fairly recently announced the acquisition of a company there. And the question is, what can we expect from Finland in the coming years?

Well -- so Finland is exciting. So we did the acquisition of Hamari Group, the Pricer partner in Finland. Obviously, the reason why we looked into Finland is because we believe we have a number of solutions for which the Finnish market is ripe. Maybe contrary to [ what ] many believe, Finland has more in common with a country like Estonia rather than Sweden. So when we look forward at the prospects in Finland, that's going to be something that's going to be done together with the Baltic organization and Estonia in particular, rather than the Swedish organization. That's on the sort of managerial and operational side. But we are, of course, very positive about how the Finnish market is, not only for electronic shelf labels but also for e-commerce. Despite [ Ulha ] pulling out of that market, there's a growing e-commerce market with the major grocery retailers there. We have our Vensafe solution, our self-checkout solution, other solutions that we own ourselves that we are very prosperous about getting into the Finnish market. But again, it's Finland, 5 million people. So when you compare the long-term potential of that market compared to a U.K. market, obviously that's smaller, but we've seen that getting good penetration in Nordic countries is something that can provide significant value for StrongPoint and obviously then our investors.

Very good. There's one here regarding our 2025 goals that have been communicated over a longer period of time. The question here is why are you scrapping the goals for 2025 without replacing them with something new? Wasn't it a few weeks ago when you repeated the goals in a presentation?

So it's correct. We -- since February 2020, we have been communicating our 2025 financial ambition of NOK 2.5 billion revenue and 13% to 15% EBITDA margins. What we've now seen is that -- well, firstly, there's lots that has happened between 2020 and now, right? A pandemic, war, and now inflation and interest rate regime not seen in many, many years. And when you on top of that get a delay in some of the major projects -- and what I'm talking about then is, in particular, the Iberia project, but just projects taking longer -- then we saw it as necessary to inform to the market that reaching the 2025 ambitions that we've set then is going to be very challenging or unlikely. That doesn't mean that we're totally scrapping them. I mean, what we're talking about here is mostly about sort of providing more time. It will take more time to achieve the ambitions that we've set, and of course, with that, a revision of the targets. And so whereas I would have hoped that we could provide that immediately now, we also want to make sure that we have a solid fundament for what new ambitions should be and not least also what kind of timing we're talking about. So we'll get back to that in the strategy update session that we have in April, along with the Q1 and Annual General Meeting. But it's a delay. It's a resetting of ambitions, but it's not a complete scrapping of ambitions. I mean it's pretty much following the same path and trajectory that we were hoping for earlier.

Okay. So everyone make sure to tune in on the strategy update session in April then for more information. Moving on there, there's quite a few more questions coming in, so I'd like to thank everyone for their engagement today. This one perhaps for you, Marius. Question is, in your report you comment some of our customers are continuing to postpone the implementation of planned projects. The projects have not been canceled, are expected to be delivered when the market conditions improve. Can you please elaborate on this and your understanding about what will be the trigger for these investments?

So we think this is mainly market driven, and we have seen this basically since last summer of 2023 for the previous 6 to 9 months. The projects that have been in pipeline and even what we could refer to as order intake have not necessarily been canceled as such, but our customers are obviously prudent in the current market conditions. And this relates to financial -- not necessarily instability, but there is a need to see a more stable environment going forward for our customers. Now I think it's important to repeat that, obviously, it's not a funding issue for our customers as such. They have solid balance sheets and definitely a spending environment where they could do it. But usually, in this kind of market, it's quite natural for the customers to be prudent and maybe postpone some of the classical or typical investment cycles. So I think that's one aspect. And partly on kind of the next question is what will trigger these investments going forward? Well, it comes back to the inflation, the interest rates, obviously. But what we have seen is that history has shown us when you have a routine of doing investments and you postpone for a certain amount of time, there will be a catch-up effect where these investments have to be put back together, replacing the products that are not necessarily out of life, but have to be refurnished and remodeled. And with that, also we have the service revenue. So obviously, we cannot say exactly when this will be. We are seeing some positive signs, but it depends on the markets as well, as we have been explaining throughout the report.

All right. Thank you, Marius. I'll see, there's one more here as well. On your backlog, you commented that 2022 was strong due to pent-up demand during the pandemic. Did any of these tailwinds also affect 2023, or is 2023 normalized and can be viewed as [ through ] levels, and you will grow from here?

Sure. So 2023 is not normal, just take that straight off right away. I think what we've seen in the market since the pandemic, or since the sort of last wave of that pandemic, was first a boost in a way, because there was a lot of investments that were put on hold and there were also a lot of shop fitting work that was pushed out in time. But when the pandemic was then -- or the restrictions from the pandemic were released, we saw a massive growth in the market. Now going into '23, more than sort of pandemic, it's been the sort of general economic environment. Most of our customers have seen a revenue growth, but a volume decline, meaning there's a tough market out there also for grocery retailers. People are -- or general households holding back investments and that's affecting what we're seeing now. So it's clearly not a normalized or expected market that we see right now. Right now, there's more uncertainty than ever, at least in many of the many of the industries that we serve, but also in general in the countries that we are operating in.

All right. Thank you, Jacob. Let's see here. There is one question, one question regarding Vensafe. The question is, we've had many Vensafe pilots in the past with no results. And what can we expect here?

Okay. So I think this is exciting. I mean Vensafe, in particular in Norway and partly in Sweden, has always been the natural way for customers to purchase tobacco, in particular, cigarettes, snus, as we call it. That's the natural way of buying it. And to some extent, we've struggled to get the Vensafe out to other markets when that's been the use case. To explain, as an example, you don't sell tobacco in grocery stores. You go to specific tobacco stores. And in the U.K., there's a myriad of regulations that needs to be sold and typically tobacco is sold over a specific or dedicated service till, a tobacco till, separate from all the other tills. So there's been all these challenges with Vensafe for tobacco sales. Now one fortunate, if you may put it like that, event for a company like StrongPoint is that what's being observed in the market is the rise of theft. And that rise of theft is -- it's seen across all markets, but it's most prevalent in the U.K., where theft is a significant industry challenge. You actually see CEOs rallying up to ask the government for more measures to combat theft. Some of our customers are actually equipping their staff with video cameras like American police officers would have, to avoid their customers -- sorry, to avoid their employees getting into issues related to theft. So my point is that there is -- it's very high up on the radar. And what we're seeing now is a use case for Vensafe, not for tobacco as such, but also for high-value items. And that is obviously a new use case for Vensafe, but it's very exciting. And when you compare with other kind of theft prevention solutions out in the market, we are very prosperous about what we can actually achieve with Vensafe there.

Okay. Very good. I see the clock is now 11:00 exactly. So I think we need to close it there. But again, I'd like to thank everyone for sending in their questions for all their engagement, and we'll talk next time.