Vianet Group plc (VNET) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Vianet Group plc Interim Results Investor Presentation. [Operator Instructions]. Before we begin, as usual, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. I would now like to hand you over to the executive management team from Vianet Group plc. James, good morning, sir.

Good morning, everyone, and thank you for joining us today with Mark and Sara. I'll kick straight into the results. Strong set of results. Beverage Metrics acquisition is now fully integrated. The Hospitality division is in growth. And we're seeing real momentum in the Unattended Retail division. And there's been further progress in new verticals where we've installed over 1,800 devices in forecourts. So we've got an established presence there. And another period where the group is ahead on key metrics. Top line growth agenda is being delivered. We'll turn over to Page 2. Quickly for those that are less familiar with the business or perhaps seeing us for the first time, I'll do a quick run-through of what we do. Basically, we help customers transform business performance, allowing them to do more with less. We install hardware that allows us to harvest data and thereby produce dashboards, alerts, alarms and insights that allow them to address waste shrinkage, improve productivity and drive sales. We have 2 key divisions. Smart Machines is the Unattended Retail division, where we provide [indiscernible] and connectivity and contactless payment solutions. The other division is our Hospitality division, Beverage Metrics, where we're in about 9,500 pubs and bars where we provide the leading comprehensive beverage and bar management system. In the Unattended Retail division, we cover areas such as the Core Vending operations, forecourts and [indiscernible]. And in Hospitality, it's the U.K. pub sector, predominantly leased and tenanted. And with the acquisition of Beverage Metrics, that's given us the relevance across managed hotels in the wider leisure arena. We have a typically Software-as-a-Service model. We install the hardware either on an upfront CapEx or a rental model. And then we enter into an agreement with customers for a subscription model that varies from 3- to 5-year contracts. And that's for service, licenses and data. Turning to the financial highlights. I won't steal Mark and Sara's thunder. I'll just sort of have a quick run through top line. Strong financial results ahead on key financial metrics and that's a result of our footprint expansion. Good to see top line growth. Focus is paying off. Profitability has increased, has its cash generation and our debt reduction. That allowed us to resume a full year dividend at the full year, and we're reinstating the interim dividend. It's a modest interim dividend that we're reinstating for the half year. Moving on to Unattended Retail, strong momentum. The bottom line is that we tick the box for customers in terms of the quality of our hardware, the customer experience, which rates ahead of the competition, our transaction rates that we benefit from the partnership with Suresite. And hardware pricing, in the period, we've continued to -- well, for the last 12 months, we've continued to be very aggressive on hardware pricing because what we want to do is drive the footprint expansion that's going to drive the recurring incomes. And again, we continue to benefit from being a trusted adviser having looked after customers during the COVID period. Our gain and retain strategy around about the 3G shutdown and the migration to 4G has paid dividends. We've secured all our existing customers on longer-term agreements for 3- to 5-year agreements. And we've displaced the competition in existing customers, and we're picking up new customers where we're addressing the competition. And we've had some good wins in buying groups where we've never traditionally been strong. Our competitor has left the payment solutions market for vending, and we're picking up some of that business. And we've also recruited their former EMEA sales director to upgrade our sales team. Building a good strong pipeline with 48 new contract wins compared to 37 last year. That's delivered 4,700 new devices in the period, of which 1,000 are 3G upgrades to our existing estate. Clearly, that doesn't give us new recurring income in those 1,000, but what it does do, it's extended the period that of a subscription to 5 years. So we're very pleased with the progress. Good footprint expansion, long-term recurring income is building. Turning now to the forecourts. The groundwork that we've done over the last sort of 18, 24 months has really been paying dividends, working with Suresite, developing key relationships and creating strong foundations. The Wilcomatic and Rontec installations are now complete. That gives us a substantial base and a reference point for other customers. The U.K. self-serve market in forecourts, whether that's rollover car washes, jet washers, wet or air towers tends to be high ticket certainly compared with snack and can vending. And the environment that our hardware is installed is quite harsh. So we've got to have a high degree of functionality, reliability and ease of user -- user-friendly hardware that allows customers to really maximize the revenues. And of course, the reconciliation is important as well. You take someone like Wilcomatic may have a presence in Tesco, Asda and Sainsbury's, where they may be in a revenue share deal. That means there's got to be basically same-day reconciliation of the funds so they can take their share of the sales. And the overall linked opportunity in Europe, Christ Car Wash systems are one of the major car wash manufacturers in Europe. They have a partnership with Wilcomatic in the U.K. We clearly have been dealing with them to develop our hardware to go into their car washes, and that gives us access to their European operations. So it's a watch this space. And we're also doing work with some EV charging prospects in Europe as well, field testing our hardware. So overall, we're making good progress in new verticals. Turning now to Hospitality. Really pleased with the progress here, delivering growth and demonstrating the long-term resilience of the leased and tenanted sector that we dominate. It's a very stable base, and it's also benefiting as the hurdle rate for running a profitable managed house increases on the back of increased costs. A lot of -- there are -- we're starting to see some managed houses being converted to leased and tenanted where the entrepreneur can spend a lot more -- is committed to that business. It's not only his business, it can be his home as well. So they're putting a lot more work in than perhaps the average manager would. So we're starting -- we're very comfortable with the strength of the leased and tenanted model. Seeing new long-term renewals with Heineken's Star Pubs & Bars and with Greene King in the last week or so. And in terms of securing new long-term business, we've had 3 new contract wins, including Marstons. The other thing that's quite exciting for us is that the big brewers are increasingly interested in getting their hands on data and understanding what's selling when and mapping that with activities that might be Sky TV or TNT, football match, rugby matches and mapping volume performance versus activity and that allows them to, I guess, to promote their brands. Again, ahead on all key metrics. So really pleased. And I think for me, the bit that's really exciting is the Beverage Metrics acquisition that really increases our relevance to the wider hospitality market beyond leased and tenanted. In terms of the FastScan inventory platform that we acquired and now that we're fully integrated our draught beer module with that, we can do full till variance analysis that gives effectively if you have one additional point a day going through your till, that pays for the system and draught beer quality. The great thing about it, too, is that the solution, the dashboard is intuitive and user-friendly. A pub manager can look at that on a -- in the morning, in a minute of day, it takes to actually see the dashboard and figure out what he needs to focus on that day, if at all. And as I say, one additional point a day going through the till pays for the system. In the period, we launched Enersave energy saving solution for glycol cooling systems for beer. We've got 20 initial sites in 3 brewers, and there's a further 100 or so installations during the second half. We charge in the region of about GBP 600 for the management hardware installation, and then it's about GBP 15 a month. It won't go across all 9,500 of our existing pubs, but there'll be a fair proportion of them where this is applicable. So it's incremental revenue. Turning the page. I guess the key drivers are the same regardless of which sector we deal in or whether we're dealing in the States or whether we're dealing in the U.K. The bottom line is the costs are going up in the recent budget, in particular, national insurance thresholds and also the minimum wage impacts our customers and the pub sector in particular. So the increase in wages, utilities and the cost of goods and there's less pricing flexibility than there ever has been because there's less cash in the pockets of consumers. So there's limited options for customers regardless of sector on what they can do to actually generate increased profits. They're going to be able to do more with less, and that's where we help. If we sort of look at the U.K. pub base, 9,500 pubs, that's a substantial business, no real competition, all on long-term contracts. So that's pretty robust, it's stable, and we continue to drive growth from that. And then Beverage Metrics, that draught beer module integrated with the stand-alone stock module allows us to actually make some progress in the wider leisure market. If we look at the opportunities in our existing customers, there's about 1,000 sites that do not currently have draught beer monitoring. There's scope for footprint expansion. And that was -- and that has reduced from 1,200 in the last 12 months. Then we've got a couple of key pilots going on in the U.K. A managed pilot is making -- has delivered really good results, and we're currently in negotiation there. And then we have a pilot at the [indiscernible], and that's with Levy Hospitality. They've probably got another couple of hundred sites across the U.K. That's helped us actually work on developing the product further and looking at real-time data. If you think about a test match, you may have temporary staff working your bars. If you -- if there's some shrinkage, you want to know there and then, you don't want to know next day, you want to do it there and then. Moving on to Beverage Metrics and just touching on what that brings to the party now that we're fully integrated. Perpetual inventory management platform combined with a fully integrated draught beer management solution. As I said, it's intuitive, user-friendly drill down. And we've learned lessons over the last sort of 5, 6 years about not doing data overload with our customers. So it's intuitive and it's straightforward and simple. And simply, the shift point-of-sale loss analysis by itself, ensuring that everything [indiscernible] is going through the till. One additional point of day pays for the system. So the bottom line is that, that should be a no-brainer. And secondly, quality. If you get a perfect [indiscernible] right first time, that means that you can improve your productivity and move on to serving the next customer. So big focus on quality, big focus on line cleaning and ensuring that beer is served through clean lines. And we've got a high degree of engagement both in the U.K. and the U.S.A. Looking -- turning to the U.S.A. I won't go into a great deal of detail, but the slides themselves say it all, the chart itself. Bottom line is we're working with key players. We've got Chili's, we have 1,250 sites, Outback have 700 sites and Darden, 1,800. And then we've started working with [indiscernible] Hotel Group. They have 40 sites, but they carry the big brands. So they're a Marriott franchisee. So a significant marketplace in the U.S.A. and we're making really encouraging progress and relatively limited cost exposure due to our relationship with Fintech. And that for me is important because nothing ever happens as fast as we want it to happen. But the fact that we have a limited cost base, it doesn't hurt us too much. We're not burning lots of cash. In terms of the proposition in the states, basically, you're looking at typical ROI 3 to 6 months, the shift point-of-sale loss analysis report itself gives the payback and the return on investment before you start to look at all the other benefits. Just looking at some of the opportunities. Margaritaville is a chain of resorts and hotels that also includes land shark and 5 o'Clock Somewhere Bars. We're on the franchise technology stack. We've had FastScan inventory solution in there for a long time now for multiple years. And they're in the process of a business expansion themselves, and we're installing beer for -- the beer module for the first time in January. So it's, again, making good progress with them. Then Chili's, we've had 20 sites with them for some time on the legacy idraught product. They've been upgraded to Beverage Metrics and we've delivered excellent results, both in terms of addressing point-of-sale loss, but also in terms of addressing beer quality and line cleaning. Chili's, one of their focus -- one focus area for them is to serve delicious beer, and we help them do that. FastScan inventory, we've got a 90 site initial opportunity with one of the benchmark players in the U.S.A. And that's something that we've been working on for a couple of months now, and we expect to see a rollout there during Q4. And Outback, we've got a 10-site pilot. We've been accepted to the -- onto the test program in the new year. So that will be a draught beer module going into Outback. And then also, there's Aura Hotels, and that gives us access to Marriott, 2 initial installations with a further 40 to go at. Bottom line is that we're helping customers address shrinkage and improve the productivity, allowing them to do more with less. Moving on to our partner in the states, Fintech. Fintech were born of the 3-tier system in the U.S.A., where the brands, distributors and the retailers have to be separated. And that's a post-prohibition initiative from the U.S. government that was ensure that government regulations were being followed, that taxes were being paid and that there was no buildup of monopolies, vertical monopolies. The system differs by state and sometimes by county. Fintech, basically, they oversee alcohol invoice payment collection and reconciliation, and they do that for 40% of all on and off-premise in the U.S.A. and they're used by 240,000 retail customers and 5,000 distributors across the States. Great news about this relationship for us is it gives us unique access to decision-makers and chains, and they have direct access to the independent sector that's very difficult for anyone. And the other beauty as well is that the cost of attending trade fairs and shows in the U.S.A. would be quite high, but we share those costs with them and share stands with them. Now why do Fintech -- why are Fintech interested in Vianet? Bottom line is that Vianet and Beverage Metrics are the operational link to the retailer for the full cycle system that covers ordering, receiving deliveries, invoicing and stock and inventory management. We provide the ongoing perpetual inventory. We provide automated ordering that goes into Fintech. And then Fintech transmit to suppliers and oversee the shipping of orders and then we receive that data again, and then we do an automated receiving for the customer and that goes back into the perpetual inventory. So a full beneicial circle that reduces labor and increases productivity and gives a point of difference for -- that will provide a point of difference for Fintech versus any competitors they have. I'll now hand over to Sara, who will take us through the P&L.

Thank you, James, and good morning. So I'll walk us through the P&L before I hand over to Mark for the cash flow and the balance sheet. Turnover this year was up GBP 500,000 versus last year, showing a 7% growth. And within that turnover, recurring revenues held very strong at 84%, increasing to GBP 6.45 million from GBP 6.28 million last year. Gross margins held strong at 67% overall with overhead costs being maintained year-on-year as what we'd expect, all of which led to the operating profit of GBP 1.43 million, which is a 10% growth on last year, where we were at GBP 1.3 million. EBITDA was up 27% on last year at GBP 1.55 million. Notice that exceptional costs were GBP 200,000 less this year as last year carrying the BMI acquisition. Earnings per share was a positive 0.06p this share versus last year's loss of 0.58p with a small profit before tax of GBP 18,000 for the year versus last year's loss of [ GBP 171 ]. Moving on to the divisions for Smart Zones, specifically U.K. and the U.S. Turnover was up GBP 300,000 year-on-year with a 7% growth and recurring revenues held very strong at 94%. The sales price of September was 9,500 and new installs were 119 for the first half. Gross margins remained steady at 81%, and this led to an increase in operating profit of GBP 1,949 versus last year's GBP 1,710. Smart Zones U.K. alone saw operating profit growth of 12% year-on-year with the U.S. having like-for-like losses of GBP 250,000 for the period, as we've explained. Within Smart Machines, turnover was up GBP 190,000 for the year with 6% growth and recurring revenues are a healthy 70%. Device sales, as we've already spoken of, were 4,716 and of which 1,000 were for 3G replacements, which we support our customers with. Outside of those, we then have 3,659 new device sales versus last year's 3,141, which was a strong 16% growth, increasing overall footprint to 37,000 versus last year's 34,500 with 48 new contracts signed in the period, all long term. This all led to operating profit on towers last year of GBP 1 million. I'll hand over to you, Mark, for the cash flow.

Thank you, Sara. Good morning, everybody. So strong cash-generative qualities of the business continued to shine through. We had an operating cash generation pre-working capital per the statement this morning of GBP 1.61 million. Last year was GBP 1.26 million, so 27% growth year-on-year, GBP 345,000. That's another strong track record of cash conversion of 104% of unadjusted EBITDA in the period. We had positive working capital of just over GBP 300,000, principally from reduction in debtors and unwinding of stock, and that improved the cash generation figure to GBP 1.92 million from GBP 1.28 million last year pre the tax rebate one-offs that we got last year. This represents a very positive 124% of EBITDA and 134% of adjusted operating profit. The cash we generated was invested in research and development and intangible assets of just over GBP 700,000. Tangible assets themselves are just under GBP 300,000. We paid the full year dividend of GBP 221,000 and obviously continue to service our bank facilities in loan repayments and interest. Overall, that led to a very positive GBP 426,000 cash inflow, which is a very positive step forward. Last year was influenced by the refinancing in August '23 on our move to HSBC. So the step forward this year has been very pleasing. If we move on to the balance sheet. Balance sheet remains strong, robust with improved and reduced net debt and improving cash position. We've talked about the working capital improvement. The cash built to GBP 2.25 million in the period. Last year at this point, it was GBP 1.32 million, that's 70% year-on-year growth with some of that cash now being invested to maximize returns. The net debt reduced to just over GBP 1 million from GBP 2.09 million last year, and I would expect that to continue. So it's a strong balance sheet to support the business ambition that James has been talking about. Back to you, Jim.

Thank you, Mark. Bottom line is that we're in what I think is a really exciting position from a commercial, financial and also strategic perspective. We've got a strong financial engine. We're in a position to drive top line growth, which will flow straight to the bottom line. You look at the Machines business, gross margins a bit lower than Hospitality, but the great news about the Machines business is that we don't need to layer on lots and lots of additional costs with new -- with the scale, which is good news. Hospitality, it's really in a position for a period of sustained growth in a fantastic position. And the footprint expansion that we've got a very strong pipeline with existing customers and then you throw in the new customers that we've gained in the Unattended Retail business, real scope for footprint expansion there, and we'll see the subscription revenues increase significantly in the next 2 years. And the bottom line is that the levers work in our favor. All sectors basically need to do more with less as costs increase and pricing pressures mount. Bottom line is that we're in a fantastic position. We've got -- we're in the right markets. The drivers work in our favor. We've got strong pipeline in both Hospitality and in Unattended Retail. We've got products that are relevant. We've got good people and we're trusted advisers. So we're in a very sound position looking forward to a period of sustained growth. That's it for the presentation. I'll move on to the questions.

There's pre-submitted question here. In your recent trading update, you say the following with regard to the U.S. business. We are encouraged by the advancements and high engagement levels in key customer pilot programs in this significant market. Is it possible to give us more of an insight into the pilot programs, specifically with regard to the number of programs, the size of programs and the time scale involved and the type of numbers involved if the programs are successful? Okay. We've got about 6 pilot programs in process at this moment in time. It's quite a time to see. It takes a while to get these programs in place. You've got to get -- basically sign off to have the pilot program because as you can imagine, these large businesses in the States have got a number of different initiatives. So getting on to the radar and getting on to the things to do is difficult, but we've managed to do that, again, helped by the relationship with Fintech. And those pilots typically last -- you sign up for a 3-month pilot, but then there's the lead in the silent period, then there's a 3-month pilot and then there's the valuation period. So it takes the best part of 4 to 6 months for a pilot and then it's going to go through the approval processes. If you look at the pilots that we're currently working on, they will -- ultimately, those businesses have the best part of 5,000 restaurants and bars that become our immediately addressable market. Second question here. You referenced long-term renewals with Heineken and Greene King. Are there any additional major contracts in the pipeline? And how does this impact your revenue visibility? Okay. We'll start with lease and tenanted. We are -- we'll start with lease and tenanted. Our existing customer base is now fully contracted on a long-term basis. So we're in very good shape in that respect. And there are another couple of major contracts that we're working on. But -- so 2 things. Number one, we've got a high degree of visibility on our core revenues, which will deliver growth in the coming year. And we've got another couple of major contracts that we're actually working on that will give us enhanced long-term visibility of our revenues. Next question. Given the size of the addressable markets in the U.K. and U.S., are there plans to explore additional international markets in the short to medium term? Okay. Well, let's start with Hospitality. Hospitality, absolute focus on U.K. and U.S.A. And we pick up bits and pieces elsewhere, but we're not spending money to grow in what are probably less consolidated markets, whereas the U.K. and U.S. are pretty well consolidated markets in terms of the number of players, and that's where we need to be focused. Unattended Retail, we can expand beyond the U.K. in Unattended Retail. We have already got our presence with Jacobs Douwe Egberts and a couple of other players in the Benelux. And we've got the potential to work on developing the relationship. We have Christ, the German car wash manufacturer and basically take it from there. Next question. How are you managing the lower margins on hardware sales? And when do you expect these upgrades to translate into higher profitability? Well, the bottom line is that any new device installation -- when we install a device in an existing installation upgrading from 3G to 4G, yes, there's a hardware margin hit there. But what we do is we secure that subscription revenue, which is very profitable for the long-term 5 years. So that's a positive. When we install in a new site, a brand-new site, the bottom line is the hardware is an enabler. We just want to get the hardware out there because that then gives us a 3- to 5-year subscription revenue contract that gives us long-term earnings visibility. So it's -- I'm less concerned on hardware margin. But we still make margin. That's the important thing. Next question, please comment on the nonrenewals on Smart Machines as it looks like the rate is running at circa 20% related to this. Please comment on the split and the number of Machines between 3G and 4G. I don't have the 3G, 4G split off the top of my head, but we can answer that in due course. The bottom line is when you talk about nonrenewals, this is about customers refining their estates. It's about rationalization of their estates. It's when they take a machine out of circulation, when they reduced their estate. So we're not losing customers. We're actually losing a vending machine in a customer because it's been taken off the streets, if that makes sense. So that's the -- and as you can imagine, the COVID impacted this and the whole work from home, if an office that was typically pre-COVID was run at 100%, it may have been running at 70% post-COVID. That's 30% less revenue potential for those vending operators to put a vending machine into an office building. So that's forced them to do a number of things. A, going back to the -- their customer, could be someone like the Royal Bank of Scotland or HSBC or whoever and saying, well, you need to subsidize the cost of this machine. Otherwise, we're going to have to take it out. Yes. all they can just take it down. Next question. Knowing that U.S. customers prefer buying from U.S. suppliers, how does Vianet address this issue? I think we have to say that U.S. customers buy an awful lot of Chinese goods at this moment in time. So it's not strictly too true. The second best to buying from the U.S. is buying from a U.K. supplier. So that's number one. Number two, we have a relationship with Fintech that gives us that inside track and we've been in the States for a while now, and we have a reputation. There's comfort from the fact that one of the benefits of being a listed business is that our accounts are -- everything is transparent, and we can actually -- and we can -- and our U.S. business is incorporated in the U.S.A. as well, and we bought Beverage Metrics, and we've got a small U.S. team. So it's not just about myself. It's about the team that we have there. That seems to be all the questions for now. I'll hand you back to Jake.

Perfect. James, Mark, that's great. And thank you very much indeed for your presentation and for addressing all of those questions that came in from investors this morning. But James, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.

I don't think the future has ever looked quite so attractive for Vianet, probably not since we gained 5,000 new installations with Enterprise back in 2006, 2007. That was pretty exciting at the time, but that was one sector. We now have growth, strong pipeline across a number of sectors and in some substantial markets where the key drivers are working in our favor. We've got products that are relevant. We have strong existing pipeline, strong financial engine. And importantly, we've got a tight young team that are trusted by our customers. So we're in a pretty damn good position.

Perfect. That's great. James, Mark, Sara, thank you once again for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of Vianet Group plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you.