Worldline SA (WLN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Worldline Q3 2022 Revenue Conference Call. [Operator Instructions] I would now like to hand the conference over to the CEO, Gilles Grapinet. Please go ahead, sir.

Ladies and gentlemen, good morning. This is Gilles Grapinet speaking. Many thanks for attending today's Worldline conf call on our third quarter 2022 revenue, and I will start this presentation providing you the key highlights of the quarter. Then Marc-Henri, our Deputy CEO, will make a deep dive on Merchant Services dynamics, as we now usually do for our year. And hereafter, Gregory, our Group CFO, will present you in detail our third quarter revenue before we wrap up from myself for the conclusion before our Q&A session. Let me start by stating that we have delivered the fourth quarter in a row, posting a double-digit growth at group level, thanks to the steady growth in particular of our merchant services activities. Indeed, after our solid H1 '22 at 12.6%, our third quarter is showing again a steady revenue momentum with 10% organic growth at group level. And I want here to focus first on Merchant Services, posting its on [ four quarters ] in a row of double-digit organic growth with close to 14% in Q3. This is worth to be noted as it was achieved while continuing to absorb the ongoing material negative impact of the complete stop of our e-commerce activities with Russia due to the sanctioned framework since Q1 this year and also facing to a more normative comparison basis as Q3 '21 was close to back to normal post COVID last year. In a moment, Marc-Henri will go more in detail into this merchant services performance, which is reflecting a very dynamic commercial development, both in stores and online. Regarding Financial Services and Mobility and the Transaction Services, the performance is fully in line with our expectations, with FS delivering in line with the expected full year trajectory while MeTS still continued to benefit from good commercial dynamics. Now regarding our strategic initiatives. First, of course, we have successfully closed this quarter the sale of TSS, which is a huge simplification of the group scope allowing a reinforced focus from us on the core activity. The proceeds led us with a reinforced balance sheet, enabling us to take full advantage of the strong current momentum for European consolidation, in particular with bank partnerships. In parallel, we have been successfully developing new strategic initiatives and we have been very active during the quarter with 2 operations executed. As you could see today, we have realized 2 investments in technology assets, the first one into a Polish company called SoftPos, increasing our merchant value proposition toward in particular, micro merchants. The second one in a Dutch company, OPP, providing us a strong marketplace solution within particular, a C2C focus on the circular economy. These 2 initiatives perfectly fit with our strategic roadmap presenting during our Capital Market Day last year, enlarging our technology portfolio. All this taken into consideration and why, of course, as all corporates will navigate into this adverse and volatile macro environment. Our performance since the beginning of the year and the robust level of transaction volume so far on our platforms are paving the way to the execution of our full year guidance we confirm today. Marc-Henri will now take the floor to guide you through the commercial dynamics of our Merchant Services activities during the third quarter that we have continued to materially develop in our key market positions. Marc-Henri, the floor is yours.

Thank you, Gilles, and good morning to you all. I'm very pleased indeed to take the floor and to guide you through this part of today's presentation, zooming on a very satisfactory merchant acquiring business market performance in the third quarter of 2022. I will comment 3 types of business information and KPIs. I will start by sharing with you the main wins and upsell of Q3 on the large merchants and the new partnerships signed allowing us to further accelerate our monetization strategy, then I will make a focus on the 2 tech investments we have done this quarter with SoftPos and OPP. And I will conclude on the full benefit of its market share and commercial developments on Worldline acquiring MSV growth. Coming to the Q3 significant merchant wins and partnerships. I must say they reflect the relevance of our offerings and the success of our orchestration strategy. Regarding the merchant wins, I will focus my comments on the new contracts we have signed with Lufthansa Group. This new gain fully reflects the benefit coming from the combination of Worldline and Ingenico assets and, in particular, our verticalization strategy we presented during our Investment Day. First, the client needs. Lufthansa Group aims to build a robust payment platform which will provide a cohesive and succinct payment offering to their group where all group members can take advantage of the service available. The partnership will give the Lufthansa Group the possibility to onboard a selection of Worldline solutions from payment methods to consolidated reporting capabilities, all integrated with our core platforms. Our key differentiator to win were first, Worldline vast experience in acquiring for airlines and our expertise in the travel industry that will also help ensure that the Lufthansa Group is best placed to offset and mitigate the risk and challenges that have emerged in recent years across the sector. Second, Worldline's continued investment in innovation, new market and airline specific services, including bidding settlement plan and airline reporting systems; and last, our unique travel hub solution, a single scalable connection providing access to over 150 payment methods and currencies, multi-acquiring, tokenization and a range of broad services all through a single reporting and settlement channel. Now coming to the partnerships. Our scale, reach and single entry point to circa 15% of the European retail continue to give us a key advantage and strongest activity in the payment ecosystem. This position allowed us to pursue the dynamic in numerous partnership signing during the third quarter with fintechs and digital native players, among others that I would like to highlight the following. First, Upstream Pay. We have signed a partnership with them to further help merchants to boost their conversion rates. We've already onboarded merchants such as Decathlon of Oslo. We developed an e-com interface based on technological live stream and chat bots solution to reach more consumers. On top, Worldline support this e-com merchants to accept alternative payment methods such as Buy Now Pay Later or wallets like Apple Pay or Google Pay or e-vouchers in parallel of traditional payment means, such as debit, credit card or wallet. With Zebra, our partnership is fully embedded into our Tap on Mobile solution. Zebra is a world leader in mobile scanning devices, and we are now going to roll out the solution across all the Zebra distributors and integrators. This solution is compatible with all Android NFC devices based on a single API, merchants will be able to transform a mobile device into a payment terminal, broadening of total addressable market to the micro merchants segment. With BigCommerce, a global SaaS-based approach -- sorry, a global SaaS-based shopping cart solution, we natively integrate Worldline online solutions, providing merchant solutions to all merchandise from start-up, mid-tier to enterprise-sized merchants. With this partnership, BigCommerce merchants will have access to Worldline pan-European acquiring or selected acceptance and acquiring solutions. Now let's dig into the 2 tech investments we have made during the third quarter. In Q3 2022, Worldline significantly enriched its value proposition for both in-store and online merchants, notably through the acquisition of a 40% stake in OPP and a 55% stake in SoftPos with a path to full ownership for both. Starting with SoftPos, this is a tech intensive Polish start-up who developed a solution to convert Android devices into secure payment terminals, enabling merchants, in particular, the smallest one to accept card payments without the need of additional hardware. Worldline knows well the company with whom we were already engaged in commercial partnership. Indeed, based on SoftPos, Worldline launched a new product internationally, Worldline Tap on Mobile. I mentioned it talking about Zebra. The solution is designed to accept the small amounts by tap, but also larger amounts with PIN entry on screen, improving customer experience. Regarding OPP, OPP is a Dutch online PSP with a proven solution for digital payment to marketplaces and platforms and with a specific focus in the consumer-to-consumer segment. OPP already serves over 100 marketplaces and platforms, such as e-Bay, Kleinanzeigen, Marktplaats, both part of Adevinta, Gumtree, Royal FloraHolland and PayPal. These brands appreciate OPP's strong features for marketplaces, including automated merchant onboarding or dispute management. This enable Worldline to comprehensively target the C2C marketplaces, which we believe will play a key role in the circular economy development. It will also serve growth opportunity in B2B and B2C domains. To conclude my part, let us come back to some business data point. All our actions to expand our merchant base have contributed to double-digit MSV growth during the third quarter. In Q3 2022 on acquiring MSV has increased 17% versus Q3 2021 to reach EUR 90 billion, which represents a strong performance in our addressable European acquiring market. It illustrates our capacity to continue to gain market share, both -- in both in-store and online with respective MSV growing at 16% and 23% -- circa 16% and circa 23% versus Q3 2021. For information, our MSV is organically up 33% versus Q3 2019. Then we continue to see a solid dynamic at the beginning of Q4 2022 with a steady trend in MSV expansion fueled by both in-store and online volumes. Last on the merchant count that we report on a semestrial basis, I would like -- just like to mention the positive ongoing trend. At the end of Q3, our net merchant count was up circa double digit versus Q3 last year, pursuing on the solid 2022 trend presented in July. To conclude this section, I hope you can perceive through the sharing of KPIs and information the strong business momentum of our MSV activity as it enjoys more and more visibly the full power of acquiring value proposition to merchants and our reinforced competitive positioning. I will now give the floor to Gregory to present you our financial performance.

Thank you, Marc-Henri, and good morning, everyone. Delighted to be presenting yet another set of double-digit growth numbers, both at group and MS level. Let me start with an overview of our revenue performance in Q3 '22. During the third quarter of 2022, Worldline's revenue reached close to EUR 1.2 billion, posting a solid 10% organic growth fueled by our MS activities that now represent almost 3/4 of Worldline's revenues. This translates into 11.6% organic growth year-to-date and EUR 3.1 billion in revenues. Now let's have a look at the building blocks of our sequential growth components. At 10%, the group is posting double-digit growth for the fourth quarter in a row, slightly below H1 as expected, given the absence of COVID restrictions during Q3 last year. In MS, it is also the fourth quarter in a row in double-digit territory with 13.6% growth, mainly fueled by high teens MSV growth and good commercial dynamics across the board. In FS, organic growth stood at 1.5% in Q3, in line with the expected trajectory given several commercial developments and good trends, partially offset by the now well-known Equens customer contract repricing. Regarding MeTS, organic growth reached 3.4%, still driven by trusted digitization and e-ticketing, while facing a high comparison basis versus last year since Q3 '21 was up 11%. Overall, our Q3 performance fully demonstrates the strength of our model, which combines strong acceptance and acquiring capabilities following the acquisition of Ingenico. Let me now detail these numbers by business line. As I just said, MS revenues reached EUR 828 million in Q3 2022. This 13.6% growth includes the effect of the Russian sanctions. The immediate closure of our Russian corridor in February is indeed costing us almost 3 percentage growth points at MS level in Q3. Commercial Acquiring growth was in the high teens, driven by all customer segments and geographies, whether in a mass market activities or with large retailers, growth was in the high teens, pretty much mirroring the instore acquiring MSV growth commented earlier by Marc-Henri. Also, our DCC products performed strongly, demonstrating the robust holiday period in our travel and hospitality verticals. Moving to payment acceptance with growth in the mid-single digits. It was impacted by the interruption of our Russian corridor. Excluding this effect, acceptance would have grown in the low teens area. Performance remains driven by: one, a steady performance of global sales and verticals, fueled by new merchant wins and upsell with existing merchants; and two, a solid performance of our digital customers benefiting from the recovery in the travel vertical as illustrated by the Lufthansa win; last, on Digital Services, we experienced low teens organic growth contrasted across geographies with good dynamics in Germany, France and in the U.K., in all customer segments, and a softer performance in the digital health care market. Commercial activity over the quarter remained strong with numerous wins for both commercial acquiring and payment acceptance, in-store and online. Financial Services, moving on to the next slide, reached EUR 241 million or 1.5% organic growth versus 2021. The activity showed good volumes, while commercial developments were partially offset by the 2021 Equens customer price reductions as expected. As a reminder, these contracts have all been successfully extended for several years at the end of 2021. Regarding card-based payment processing and acquiring outside the Equens customers, we have experienced a positive performance driven by good dynamics in APAC as well as improved transaction volumes in Belgium and Finland. Digital Banking was low single despite continued PSD2 volume growth and country expansion. Finally, in account payments, performance has been softer with less project activity this quarter, but still good developments on the UniCredit contract now in run phase. Regarding the commercial activity, we've had several wins and partnerships based on innovative solutions for our banking partners and clients. Among others, I'd like to mention the DFM win. With that 5 years outsourcing contract, Worldline will handle instant payments and back office processing services for Volkswagen Bank. Last, I'd like to mention that our pipeline of new projects remain significant across Europe with a sales cycle that implies the closing of large deals hopefully before year end. Let me conclude this part with MeTS. Revenue reached EUR 89 million, up 3.4% organically as expected. Looking at it by product, Trusted Digitization grew double digit during the third quarter while e-Ticketing activities performed steadily, fueled by increased volumes in the transportation vertical. Finally, on the e-consumer and mobility, we have experienced a mixed performance with contact activity impacted by the re-insourcing of a French-secured mail telco operator contract. This effect has been partially offset by the ramp-up of newly-signed contracts and increased activities of our new cloud solutions. In terms of commercial activity, MTS third quarter has been dynamic. As an illustration, we have won an 8-year public RFP with CNAF, by which Worldline will roll out its contact solution for calls management of the French welfare national organization. Now let me hand over to Gilles to conclude.

Many thanks, Gregory. I'm now indeed moving to the key takeaways of this Q3 '22. Actually, the 3 key messages that I would like you to keep in mind are the following ones: resilience, innovation, consolidation. First, resilience. The resilience of Worldline growth profile despite this complex macro environment in which we all navigate. As you could see, Merchant Services is growing double digit, the fourth quarter in a row of strong growth. It is fueled by past and current market share gain. It is fueled by the revenue synergies with Ingenico and the relevance of the Worldline extended value proposition in the market that is more and more visible. While FS and MTS posted growth in line with their full year trajectory. Second is clearly the strong benefit of our product innovation positioning. This is more and more a clear key differentiating factor and the reason for which we win RFPs or even potential strategic bank partnerships. It is fueled by in-house innovation, illustrated, for example, by the win of Lufthansa or the Zebra partnership that Marc-Henri commented sooner. But it is also set to be increased by targeted technology acquisitions as seen today with SoftPos and OPP and that you remember, as part of the plan we presented during this year. Third, consolidation. Our positioning to pursue the market consolidation is better than ever. The TSS disposal clearly increases further our strategic flexibility to pursue our European consolidation ambition. There are many active opportunities in Europe as we speak that we are currently pursuing. And we are totally confident that Worldline is the best suited to take advantage of most of them. Our game remains to create a pretty unique combination in Europe of innovation, distribution, power and industrial scale to create leading positions in every European country, and of course, further improving this positioning by converting our active pipeline of M&A opportunities. Today's results are, I believe, overall, one more proof point of the solid execution of our vision. Now to end this presentation, and as I said, I confirm our 2022 guidance: 8% to 10% revenue organic growth and OMDA margin improvement between 100 basis points and 150 basis points; and finally, an OMDA conversion rate into free cash flow of circa 35%. Given our performance year-to-date and the current macro context with robust transaction volumes so far on our platform, but accelerated inflation on costs, organic growth is expected at the top end of the range, while OMDA margin improvement should be at the low end of the bracket. Thank you very much for your attention, and I am now ready with Marc-Henri and Gregory to take your questions.

[Operator Instructions] And the first question from Frederic Boulan from Bank of America.

I'm not sure if you can hear me.

Yes, very well. Go on, Frederic.

So just a quick question on my side around your last comment on your outlook for the year. So you've already performed very well year-to-date in terms of revenue growth. What are the assumptions you're taking in terms of guidance? So if we look at the high end even 10%, that implies a pretty sharp slowdown in the fourth quarter. Last year, we had Omicron in December impacting volumes. So what are the moving parts -- is this something we can reach in the tough macro and the macro bookings in the end more benign? There is some upside to that. So just trying to see what are the assumptions within that. And in particular, if you can give us an update more around cross-border and travel volumes, how trends are -- have evolved, are evolving, how you see trends going into next year?

I will take the question. Indeed, if we look at the performance year-to-date, as you rightly pinpointed, it is a very solid organic performance, should, as I mentioned, by definitive market share developments. And of course, so far, a pretty solid domestic consumption in Europe that we could measure through our transaction volumes. This said, indeed, when we -- if we were to project just the world as we saw it over the first 9 months into Q4, most probably, we could totally agree that there is no reason to anticipate any particular slowdown in MS activities. But still, well, like yourself, we see all the macroeconomic concerns around the uncertainties, the constant messaging coming from any public authority around risk of recession, energy prices skyrocketing, potentially many debates in many countries around the way this could be shielded or accommodated by public budgets. So we decided very consciously not to take any particular risk in the guidance in this particular context. So I assume that we have taken a very cautious stance on year-end spending that are very important in the business, as you know, such as Christmas, discretionary spending, potential year-end travel, on all these things, we decided not to take any debt. We know that we've been performing well that we will end up probably in any case at the top end of the guidance, maybe higher if things were really good. We just don't know today, and we don't want to embark any risk in the trajectory of the company. Our central scenario is clearly, as I mentioned, to be at the top end of this bracket in the world we see today. That's for sure, not embarking any additional debt for next year -- for the next [Technical Difficulty] Fundamentally, we plan for the worst, and we hope for the best.

Okay. Great. And any specific comments around travel trends?

Well, so far, it has been still solid. What we receive for...

No, Q3 was really excellent from a travel point of view. And as we speak, we do not observe yet any slowdown. So the levels of bookings are good. Now the year is not over, so we'll see. But at this stage, the levels remain good and the bookings remain good.

[Operator Instructions] And the next question from James Goodman from Barclays.

I'll go for a couple as well, please. And firstly, just on, I guess, the comment Gilles made around strategic bank partnerships, but of course, there's a lot in the pipeline. We've read recently about some negotiations with Credit Agricole. I appreciate you can't comment specifically on when any one potential transaction. But just in terms of directionally what something like this might involve. In the past, we've seen a failed provider and partner on online payments, specifically, and we've seen banks like Credit Agricole focusing on in France their online presence. Would that be the focus of these sorts of partnerships? Or could it involve more of a commercialization of the fuller merchant book? That's the first question. Second question, just around Germany, actually, I mean the Lufthansa have been very encouraging in the quarter, interesting context there. We've seen Fiserv and Deutsche announced a partnership, obviously, other vendors aggressively pursuing growth in Germany. So does the win like Lufthansa help with your competitive position in Germany? And any update there?

James, as you can guess, I certainly will not venture myself indeed into commenting on any type of market speculation. But your question is giving me a great opportunity to expand my observations, answering your question on what is actually happening in the European landscape, particularly from large leading domestic banks in many countries. As I mentioned, we have a pretty active pipeline of discussions. More or less, all of them having some common ingredients. The first one is there is a general recognition by banks that their technology is not allowing them to perform as they would like in their respective markets. So one of the first reason for which they engage with a company like Worldline is accessing our technology for their domestic market development and keeping solid merchant relationships. That's number one. And it is true for our POS technology but also true for our e-comm capabilities. And it is, in general, true also for 3 other things we can bring in the equation. One was visibly demonstrated to date is the verticalization of our offerings that are more and more relevant, particularly for Tier 2 and Tier 1 customers in many verticals that banks don't have these type of offerings. Number 2 is the ability to cope with the very small end of the market, the micro merchants, different technologies, of course, is a good example. [Audio Gap] And the third one, of course, is the access that Worldline provides to a very vast range of payment methods, payment scheme, payment solutions, which is also more and more important in this world where merchants are facing customers from many different countries. So that's number one, the need for technology. Number 2 is, of course, our genuine interest to expand our distribution network. As I mentioned, more regularly, the merchant acquiring business is a very powerful -- the winning recipe for Merchant Services is a combination of technology and distribution at scale. So there is a genuine way to work with banks, which is to leverage the power of their brands and distribution if you provide them with the good products and technology. This is a common theme across Europe. That's my message today. Whatever you may read somewhere, keep in mind that it will be always for us the way we look at it is combining our [Audio Gap] really leading technology with a new channel to distribute the Worldline technology. And third, what is important is that depending on circumstances, this may imply an M&A transaction, the acquisition of the merchant book, the back book. It may imply the setup of a partnership. It may take the form of a JV. Well, my answer here is any transaction is always net to measure to make sure that both parties find what they are looking for. So we are not done at all with the European consolidation. I love this moment where Worldline is not only search for its balance sheet, but more and more for the quality of its technology. That is where we are, and that is making us extremely strong in the current environment. And regarding Germany, I don't know, Marc-Henri, if you want to...

Yes. I think James was asking if I understood well is the Lufthansa Signature was a sign of reinforcement of our position in Germany. To give you a simple answer, no. In fact, our position in Germany is very strong. I think we are #1 on the German market. For Tier 1, it has delivered superbly. It continued to deliver superbly, but the Lufthansa deal doesn't owe to the German positioning. It owes much more to the fact we are multi-country in Europe. The Lufthansa Group, it's a group here. So you have Brussels Airline, you have Swiss Airlines, you have also in Australia. So it's about having the ability to be super good in these various markets to be able to combine all of them and to serve the global platform. So travelers from all around the world, having all the payment needs consolidated in 1 online solution connected to all the best industry platforms in terms of airline booking systems and others. So it really owes to its global positioning connected to our local acquiring. It's a worldwide win. It's both a pan-European and a worldwide win. It's not particularly related to strength in Germany. This being said, our strength in Germany is not ambiguous, and we have delivered a very good performance again in this quarter with Tier 1.

We are now taking our next question. The next question is from Sandeep Deshpande from JPMorgan.

Can you hear me?

Very well, Sandeep.