Worldline SA (WLN) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Worldline Q1 2024, Revenue Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Gilles Grapinet, Worldline Group CEO. Please go ahead.

Thank you, operator. Ladies and gentlemen, good morning. Let me start with today's agenda and what we will cover in this presentation. After my introduction on the key highlights of the first quarter 2024, I will come back specifically on the evolution of Worldline governance that the group announced a few weeks ago. I will then give you an update on our business and commercial dynamics throughout the quarter. Hereafter, Gregory, our Group CFO, will present you in detail our first quarter revenue performance before a wrap-up from myself for the conclusion before opening the Q&A session that we will handle as well with Marc-Henri Desportes, our Group Deputy CEO. Let's have a look now at the 3 main highlights of Q1 2024. First highlight. As planned, we delivered the first quarter fully in line with our full year '24 outlook with the Q1 organic growth at group level of 2.5%. Gregory will give you the details later, but this performance was mostly driven by Merchant Services, posting an organic growth close to 4%, in line with its anticipated full year trajectory and benefiting from several commercial successes all along the quarter. This was achieved while absorbing the impact of our merchant termination process. Excluding this effect, the underlying growth of Merchant Services came at 6.5% despite the macro and consumption momentum which stayed soft during Q1 as anticipated. Financial Services and MeTS are delivering in Q1 as per their anticipated '24 trajectory, too. Second highlight. In the meantime, we are in execution mode to deliver all the immediate priority actions announced end of 2023. Regarding the merchant portfolio termination process is now fully behind us with all merchants concerned having been notified. Thus, our EUR 130 million revenue impact announced is clearly reconfirmed as a maximum. Regarding Power24, its implementation is in full rollout mode in all targeted countries, and I confirm our objective to deliver EUR 200 million run rate cash cost savings minimum in 2025. Third, we have finalized the creation of our strategic joint venture with the Credit Agricole Group in France, which will offer soon the best of our 2 groups to merchants and retailers operating in France. We have received all the necessary approvals. The management team is now in place, and the brand has been launched under the name of CAWL, C-A-W-L. Now we are in the process to obtain the payment institution license from the French regulator, and this process is also fully on track, and we confirm the objective to have the joint venture fully live early 2025, starting to generate revenue for our group. Finally, Worldline has also announced as planned a renewed Board of Directors to be approved at Worldline next AGM in June 2024. In line with the group commitment, the board composition would be reduced from 15 to 12 board members plus 2 employee directors with the new Chairman and 3 new directors entry. As announced, Mr. Wilfried Verstraete has recently been coopted as a director and the Board intends to appoint him as a Chairman following the general meeting to be held on June 13, 2024, at which it will be proposed to ratify this appointment. Mr. Georges Pauget, will remain interim Chairman until Mr. Wilfried Verstraete is elected Chairman in order to facilitate a smooth transition. He will then resign from the Board of Directors. In addition, 3 new directors are expected to join the Board as of the upcoming AGM. 2 independent directors, Ms. Agnes Park and Ms. Sylvia Steinmann with strong international executive background including respectively, in human resources, IT transformation and finance. One nonindependent director, Mr. Olivier Gavalda, Deputy CEO of Credit Agricole with extensive financial and banking expertise. As part of the proposed changes, 3 current board members, Ms. Agnès Audier, Mr. Lorenz von Habsburg Lothringen, and Ms. Danielle Lagarde have decided not to renew their mandate. And then 2 other board members, Ms. Caroline Parot and Mr. Gilles Arditti will resign from their current mandate. This recomposed board will offer a balanced representation of skills and expertise and the diversity of its members adapted to the next strategic development phase of Worldline. Coming now to the Q1 business and commercial dynamics. I will start, as usual, with our commercial acquiring MSV development. In Q1 2024, Worldline acquiring MSV is up 4% reaching EUR 110 billion. This development is in line with the trend shown last February, reflecting the current unchanged soft macro context in Europe. MSV was up plus 3% instore and plus 10% in online. Looking at the beginning of the second quarter, the trend observed in Q1 continues with MSV in been the same range of growth, as you can see. In this environment, Worldline commercial activity remains dynamic as shown in the next slide. Starting with Merchant Services and first with small and medium businesses go to market, this entity has performed well this quarter in numerous countries, in particular, Switzerland, Germany and Italy. I would like to focus on Italy where we have made a significant development through the new organic win during Q1 '24 of an important strategic partnership with Cassa Centrale Banca. We are particularly pleased and honored to have been selected by a major group like CCB through a competitive tender. It will be a very meaningful step forward for consolidating the Worldline presence in the Italian market and accelerating our commercial momentum in the country. This is also a recognition of our distinctive ability to perform in Italy with a competitive and cutting-edge offerings, but as importantly, with a proven and successful business support and assistance model for our local partnering banks. The partnership with CCB involves a full end-to-end offering for international card networks to circa 60,000 net new merchants generating incremental transacted volumes of circa EUR 6 billion. From 2025, it will allow us to strongly increase our Italian footprint growing our regional MSV by circa 20% and our number of merchant locations in the country by close to 40%. These deals add to the numerous existing distribution partnerships already built in Italy since 2021 with major local financial institutions, including BNL, BNP Paribas Group, Banco Desio, and Banca del Fucino. Now turning to our enterprise go-to-market. During the quarter, we have secured several wins and signed a number of partnerships relying on our product differentiation and dedicated vertical offerings. Starting first with the enrichment of our online geographical value proposition. We have signed a partnership with the fintech Lidio in Turkey. It has been approved by Turkey Central Bank, making us the first online payment service authorized by TCB for international payments. The joint Worldline and Lidio solutions streamlines the process of accepting Turkish payment, optimizing time, cost and payment performance of up to plus 25% in approval rate increase compared to a customer previous connection, while ensuring full compliance with the local Turkish regulations. This solution includes the acceptance of the domestic Troy cards for international businesses which represents a breakthrough entry for global e-com players willing to expand their activities in this $72 billion market. On the verticalization and ISV-related distribution front, we have developed our ISV channel, partnering with Tabesto, a major actor in order taking and payment solutions within the restaurant. Together, we will deliver a unique customer experience planned for 36 countries. We will jointly launch the first all-in-one fast ordering and payment carrier system using 1 of our key products SoftPOS Worldline tap on mobile technology. During the quarter, we also signed in MS, a number of other important names, as you can see on the slide, and we continue to extend the use of our solutions to existing customers to offer new products. Two points that I would like to highlight here. The dedicated solutions for EV charging players continues to have a strong traction with the signing of names such as Electra, Road or Kempower, allowing us to capture this fast-growing market, thanks to our dedicated vertical solution and specific features. And we have extended our 16-year partnership with ASDA, the U.K.'s third largest supermarket group to deliver now a full omnichannel payment solution, combining POS acquiring services and smart transaction routing through the Worldline payment orchestration engine to enhance the customer experience and operational efficiency for approximately 800,000 weekly deliveries. To conclude on this part, and I say during our full year publication, Worldline Merchant Services is currently developing successfully it's strong growth engines with regular opening of new geographic corridors for Global eCom as illustrated today with Turkey, growing its ISV partnership distribution as seen with Tabesto or reinforcing its vertical value proposition, as, for example, with the EV charging wins. In combination with our strong and growing distribution network, this product-centric strategy is a core pillar of our next development phase and will be much more detail during our next Capital Market Day. Regarding our 2 other business units, Q1 was dynamic in terms of commercial development led by Worldline core products now. Starting with FS, I'm talking indeed about next-gen core product and value proposition, I would like to highlight the successful go-live of our new target card issuing platform on the German market. We have indeed successfully completed the migration of Consorsbank Visa card portfolio from the existing mainframe solution to our cutting-edge customer-centric new issuing processing section. This is the first successful migration of the scale portfolio towards our new product generation on the German market, following its already successful rollout in the Belgium market. This new card issuing product will bring numerous new features and added value services like, for example, instant card issuing. It also provides, for example, to Commerzbank to Consorsbank here, access to our pan-European economies of scale and ensure compliance with future market requirements and regulations. In parallel, we have extended several contracts on the issuing side Luso in Asia Pacific, or BKM in Italy. Regarding MeTS, our dedicated product for the eHealth vertical has been in the partnership signed with Secunet. This product offers a simplified, secure and digitalized access to digital medicine and health services for doctors, nurses, pharmacists and all health professionals in Germany, leveraging our secured telematic infrastructure gateway. We have a proven track record in this field with more than 350,000 acceptance points already managed. We have as well deployed our payment orchestration and messaging offering with the signing of a contract with a major nationwide rail operator while leveraging our offering for fleet management with a large integrated energy company. Let me now hand over to Gregory to walk you through our detailed Q1 revenue pattern.

Thank you, Gilles, and good morning, everyone. Let me start with an overview of Q1 revenue performance. First quarter revenues came in at EUR 1.1 billion, representing organic growth of 2.5% in line with the expected full year phasing. Restated for merchant terminations, Group Q1 growth stood at 4.4%. GBL by GBL, Q1 performance is as follows: MS is up 3.9% or 2.9% on a net-net revenue basis, i.e., excluding scheme fees and partner fees. And excluding merchant terminations, underlying growth is at 6.5%, thanks to strong commercial dynamics and good traction in select verticals. Financial Services was down 1.4%, impacted by lower volumes in account payment division despite a good dynamic in card processing. Finally, MeTS revenue was up 0.7%, in line with expectations. On a net-net revenue basis, group growth stood at 1.7% organically. Let me now zoom in on performance by business line. Looking at MS in more detail. Revenues reached EUR 787 million, up 3.9%. In commercial acquiring, underlying growth improved versus Q4 driven by strong commercial momentum in Italy, as explained by Gilles earlier as well as good wins in Switzerland, one of our core markets. Payment Acceptance posted healthy growth led by increased online travel and gaming volumes, which benefited from the ramp-up of contracts like Turkish Airlines, that signed last year and of an increase in the share of wallet with visit. Last, on digital services, performance was solid in key countries like Germany and Turkey. Looking forward, MS growth profile should continue to improve with a progressive grocery acceleration in H2. Turning to FS revenues. They reached EUR 225 million in Q1. FS saw increased trends on the card processing front in Belgium and in the Netherlands, more than offset by lower volumes in account payments, while digital banking was stable. Looking forward, after stabilization in H1, FS should slow down in the second half with lower volumes on existing contracts and some reinsourcing only partially offset by improving commercial dynamics. Moving on to MeTS. Revenues stood at EUR 85 million, with good underlying growth in our trusted and transport and mobility services both benefiting from new projects and increased ticketing volumes. This was slightly offset by some project delays in France. Looking forward, MeTS is expected to improve through 2024 in terms of growth. Overall, group growth in the first quarter came in line with expectations with good momentum in MS. And just as a reminder, in terms of phasing, we assumed softer growth in H1 '24 mainly due to merchant terminations in an overall unchanged macro environment. Now let me hand over to Gilles to conclude.

Many thanks, Gregory. And to conclude indeed, this presentation, let me reemphasize that we are actively executing the necessary transformation actions to strengthen our business and financial performance with a very heavy focus this year on execution, notably on the following drivers: number one, Power24. It is in full execution mode with the transformation process launched in all targeted countries. It will deeply adapt our operating model, but more importantly, we'll structurally improve our operating leverage for the medium term. Number two, clearly, our efforts and priorities are on improving our free cash flow generation supported notably by a fast planned reduction of integration cost that is moving as per plan. We have also deeply adopted our incentive schemes to reflect this priority. Number three, regarding our Credit Agricole joint venture, we could successfully meet 2 major milestones with antitrust approval and closing of the transaction, allowing the new management team and the 2 parents to actively prepare the go live early '25. And in parallel, of course, we maintain our strong investment road map on the product and innovative offering of Worldline to pave the way for future growth acceleration. Moving forward, I confirm that we will hold the Capital Market Day in the second half of 2024 where we will do a deep update on the Worldline future trajectory, product offerings and competitive differentiators. To close this presentation, we confirm our full year '24 guidance as follows. We expect to deliver in '24 top line organic growth of at least 3% and on the adjusted EBITDA level, we expect to achieve at least EUR 1.17 billion. Finally, we expect free cash flow of at least EUR 230 million. Thank you very much for your attention, and I am now ready with the team, Marc-Henri and Gregory to take your questions.

[Operator Instructions] We will now take the first question coming from the line of Frederic Boulan from Bank of America.

If I can ask 2 questions on market dynamics. So you showed MSV remaining pretty soft at 4%. If you can break down a little bit what you're seeing in terms of different components of that. So between consumer spending, move to cash, less payments and market share dynamics. If we can share any detail on how that chart and trend would have looked like excluding merchant terminations? And when we look at this underlying growth of 6%, second question is, to a degree, it's impacted by pricing. So last year, I think you had this repricing program going what's the status here? And more broadly, can you comment on the level of competition and competitive dynamics you're seeing in your key markets, in particular, Germany?

Yes, sure. Thank you for the question. Maybe I will start, Marc-Henri can complete on the MSV front. I think fundamentally, what is still driving MSV dynamic for what we see still primarily consumption trends in Europe, I would say. We have not noticed particular changes in the, I would say, cashless momentum, which I think is still on its healthy solid medium-term development. And there are still meaningful number of cash-based transactions in certain countries in Europe, as you know. I think the main driver stays a soft consumption dynamic here globally across key countries, even if there are some better volumes that we could see in countries that were more affected probably somewhere in the second half of last year. We mentioned that we see indeed a bit better the underlying dynamics in the German market. Maybe Marc-Henri, you want to add a few colors here?

Just a couple of additional elements. The impact of merchant termination is pretty small on this MSV development as they were not representing a significant share of this MSV and we are below the 1% level. So indeed, as you say, it is primarily a consumer spending dynamic that is impacting as we see, and we will see how things evolve throughout the year, the MSV development. Regarding your question on the pricing. On the pricing, what we see is we have regular repricing for part of our portfolio. I mean, the eSMB portfolio. And overall, it allows us to have take rates evolving slightly positively. So it is indeed supportive of the underlying growth and also a good sign that in terms of competitive positioning, our mix of business is not subject to significant price pressure, so it impacts slightly our growth performance, but it's not the main driver. So just to make a long story short. Main driver is more connected to underlying volume developments of number of merchants development of our product activities.

And if I may follow up on the free cash flow and EBITDA. So I know it's not a EBITDA quarter, but you mentioned the restructuring plan is going ahead. Can you maybe share some commentary around phasing of EBITDA and free cash flow this year between H1 and H2? And also if you can confirm some of the free cash flow dynamics that you had discussed for 2025 in terms of restructuring costs and border free cash flow dynamics?

So first of all, we are completely on target with regards to the free cash flow profile as we mentioned before, and you know our general trajectory, H2 should be much stronger in terms of EBITDA and free cash flow phasing and we are completely in line as well with our overall trajectory in terms of improving free cash flow conversion in '25 onwards. So completely in line at this stage with, as we said, the bulk of the Power24 costs to be incurred this year, in particular, in H2 once the social processes will be done with regard to Power24.

We will now take the next question coming from the line of Mohammed Moawalla from Goldman Sachs.

Two from me. First, I just wanted to sort of clarify on the impact of the kind of high-risk contracts. That was probably a little less than what we were expecting in the quarter. Did I hear you correctly to say that it's kind of largely done and we should think of the impact in the second quarter and the rest of the year to be even less than the -- than what we saw in sort of Q1? And then related to that, so how should we think of that underlying, I think you called out 6.5% Merchant Services growth. Does that accelerate further in the second half? Or is that still kind of the run rate you expect to sort of hit? And then just coming on your comments on Financial Services, I sort of sense a slightly more cautionary tone on the second half when you said that the growth would slow, given the easy comps are you thinking more flat growth in Financial Services in the second half? Or does that still kind of potentially decline?

Thank you, Mo. In terms of the high-risk contracts, what we said is that it's been completed as of the end of Q1. And we confirm that the EUR 130 million that we announced in the past results is indeed a maximum. So that's the first part. Going forward, it means that we will be having a tougher comp in Q2 where those contracts were still ongoing in 2023, while the comparable will improve in H2, hence the acceleration we have mentioned in a macroeconomic environment that is unchanged. And with regards to the overall underlying growth in MS, I will let Marc-Henri comment.

On the underlying growth, we see that we are going to accelerate it progressively towards the year. So we'll have more of this momentum in H2. Maybe just to complete one thing on what Gregory just said. You may remember that we stopped the portfolio of merchants already some termination occurred middle of last year and the base effect and a part of it has been more progressive. And in fact, as Gregory explained, with all termination letters sent by the end of this quarter. So most of the impact now behind us in terms of end of the revenues and a bit of the phasing in front. So MS overall momentum accelerating in H2.

And finally, on your FS question, we are indeed looking at a stable H1 and an H2 slowdown on the back of lower volumes. This is all factored into our full year '24 guidance. And what we see is a growth coming back during 2025, with major opportunities coming within the banking sector, whether it be mandatory instant payment implementation by year-end next year or EPI launch in participating countries as well as digital euro where we are well positioned.

We will now take the next question from the line of Alexandre Faure from BNP Paribas Exane.

Three questions, if I may, and maybe I missed a few things earlier. So going back to the previous question in terms of the underlying growth in MS over the course of the year, sort of stripping out the new risk management framework. I think you called out 6.5% in Q1. Just wondering if there was a leap day impact in that number and how we should think of an acceleration there sort of adjusting for termination of merchants that you discussed earlier? My second point was -- maybe if you could help us understand this extension with ASDA, for instance, in the U.K. and who you were competing with, how the new relationship compares to what you were doing before with that, that would be interesting. And lastly, going back on one of the commentary earlier in payment acceptance, you called out Turkish Airlines ramping nicely. And I think you also mentioned a few wallet share gains. I was wondering if you could elaborate there where you saw commercial success and whether there were also any new logos outside of Turkish Airlines in payment acceptance?

So I'll take the first one. On the underlying MS growth, we indeed see 6.5% in Q1 in underlying. This is -- that we see a limited impact of leap day. Going forward, what we are anticipating is that this underlying growth should be sustained. And therefore, in terms of reported growth, we'd have an acceleration given the comp that is becoming gradually more favorable with the risk policy presentation having started in Q2 last year.

Regarding the wins. So ASDA is an existing relationship, it's not a new contract, that's true, but it's regularly pending, including the dimension of acquiring, which is in the U.K. market, a very important element for us. And you may remember, we were granted a license which was also a good sign of the health of relationship with the regulators. So from that point of view, it's an extension and increase of the relationship with ASDA. In terms of wins overall, and you were asking about the competition on the U.K. market, we see the usual players. We see also some newcomers and some more aggressive fintechs. I'm not going to give the name of my competitors, but they are on this competitive environment. And on this very big retail, we remain a leading competitive edge thanks to the combination of the scale for acquiring platform on the one hand and the scale of our acceptance solution on the other hand. That's making a good difference.