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Edited Transcript of GUNN.ST earnings conference call or presentation 19-Jul-19 7:30am GMT

Q2 2019 Gunnebo AB Earnings Call

GÖTEBORG Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Gunnebo AB earnings conference call or presentation Friday, July 19, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Henrik Lange

Gunnebo AB (publ) - President & CEO

* Susanne Larsson

Gunnebo AB (publ) - Group CFO and Head of Finance & IT

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Conference Call Participants

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* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Gunnebo AB Q2 Report. Today, I am pleased to present CEO, Henrik Lange. (Operator Instructions) Sir, please begin.

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Henrik Lange, Gunnebo AB (publ) - President & CEO [2]

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Thank you. So ladies and gentlemen, hello, and good morning. Today, we released our report for the second quarter 2019. And joining me today are, as usual, Susanne Larsson, group CFO; and Karin Wallström Nordén, SVP, Marketing, IR and Communications. Our quarterly call will, as usual, be done following the sequence of the slides in the presentation available on our website.

And on the first slide is Gunnebo 2 -- quarter 2 2019. We experienced a strong sales development and improved result in the second quarter, and we also have launched a cost-efficiency program to accelerate the margin improvements. So we saw good growth in order intake and net sales. I'll come back to that. And on the cost-efficiency program, we had a successful implementation of our business unit structure in Europe. We now enter the final stage of dismantling the matrix organization, where we plan to reduce overhead cost as a result of a leaner and simplified way of operating our business. The program will cost SEK 60 million and generate SEK 100 million savings, with the full effect from quarter 3 2019.

Cominfo, acquisition of Cominfo. The acquisition is in line with our corporate growth strategy and will further strengthen our market position for our profitable business unit, Entrance Control. Acquisition will, on an annual basis, add approximately 30% of those sales to the business unit Entrance Control, as we present to the total group sales.

And also, in connection to the acquisition, we have communicated that there's a proposed underwritten Rights Issue announced that will take place -- is planned to take place during the third quarter. And also, we have a new Group Executive Team as from year-end following my resignation as I hand over to Stefan Syrén, and I'll come back to all of these issues.

If we turn to Page 2, the order intake. The order intake continued to grow in the second quarter by 5% and 2% in constant currencies, and order intake was strong in Entrance Control and Safe Storage, both with a 40% growth and approximately 10% in constant currencies.

In Cash Management, order intake contracted in the quarter by minus 5%. In Europe, the biggest market for cash Management, order intake grew, where I think it contracted in the Americas due to low activity in the U.S. and APAC due to tough comparisons from last year.

In Integrated Security, order intake contracted by minus 9%. In Americas, order intake grew, whereas it contracted in both APAC and Europe.

All in all, we experienced a good momentum in the new way of working in Europe, [where demand, I mentioned], in our business units have vastly improved customer focus and order intake as a result.

And then next on the net sales. The sales grew by 10% in quarter 2 and 7% in constant currencies, which is a very strong sales growth. So with the strong performance in both Entrance Control and Safe Storage, we grew faster in these business units in the market, which is also encouraging and a good sign of the new way of working.

In Cash Management, sales contracted in total, but with good sales growth in Europe where we have adopted a new way of working and lower sales in both Americas and APAC for the same reasons as for the order intake.

On the EBITA side then, in quarter 2, we have an EBITA of SEK 73 million, which is up 10% on last year. We saw EBITA improvement in the 3 business units in the quarter in monetary terms, and the margin was on par with last year at 5.3%.

And then we have launched this cost-efficiency program, as I said, as the final step to dismantle the matrix fully and globally roll out the new way of working with our business unit structure, and that will generate the cost savings of SEK 100 million, with full effect from half year 2020. We will bring -- we bring nonrecurring charges of SEK 60 million, where the majority of approximately SEK 50 million will be taken in 2019.

And it is a mix of productivity improvements in Europe, mainly within Business Unit Safe Storage and Integrated Security, but also some in Cash Management as well as management changes to the Group Executive Team, and the charges connected to the cost-efficiency program will mainly be people related and will be reported as IAC costs. And this will be monitored and displayed to you going forward between now and then half year next year.

Then, next slide, we welcome the Cominfo as part of the group, and we will further strengthen the Business Unit and Entrance Control. As I said, it's an increased sales on Entrance Control by some 30%, and we have an annual sale of SEK 140 million. And the profitability of Cominfo is in line with Entrance Control, high profitability. It's a good strategic fit that will extend geographical footprint and product offering and also give synergies within production and R&D. And we signed this in quarter 2, but we closed it in quarter 3, so it will be consolidated into Entrance Control as of the quarter 3 2019.

As in the combination with announcing that we have acquired Cominfo, which we believe is a good step forward and in line with our strategy for profitable growth, we'll also propose underwriting Rights Issue of some SEK 360 million, and that will then cover for the acquisition, but also will improve the balance sheet after the acquisition of Cominfo and allow to better capture future opportunities in the market.

And the 2 largest shareholders, Stena Adactum AB and Vätterleden Invest AB, are underwriting the Rights Issue. And then subject to approval by an Extraordinary General Meeting expected to be held in August 2019, we will go ahead and do this Rights Issue, and it's intended to be completed during the third quarter of 2019. And the detailed terms and conditions for the Rights Issue will be presented ahead of an Extraordinary General Meeting.

And then changes to the Group Executive Team. First and foremost, I'm happy to announce that Stefan will take up the position as President and CEO during November at the latest, in addition to his current responsibilities, succeeding myself, who has decided to resign. And I've been here for 4 years, and we have really changed the group, but I think it's the right time to hand over the baton to Stefan and the leaner team to drive this business unit concept globally in order to generate shareholder return for the shareholders in driving a better performance and unit growth.

And also, Robert Hermans, who is the head of the Business Unit Entrance Control, will, on top of his current responsibilities, has been appointed Executive Vice President for the Gunnebo Group, in conjunction with the shift of President and CEO from myself to Stefan.

And then the regional structure for Asia Pacific and Americas will cease at year-end, and then Sacha de La Noë who is Senior Vice President of Asia-Pacific, Middle East and Africa; and Dan Schroeder, the Senior Vice President Region Americas, will leave the executive team and the Gunnebo Group at the end of the year due to these changes. I'd also like to thank both Sasha and Dan for a very good job done in being part of this transformation and managing the good businesses that we have in the regions.

So then summary for the quarter. Again, good order intake, good net sales and EBITA increase in Swedish krona of 10% and the margin in line with last year.

So with that, I hand over -- no, I will take one more slide here on -- also on the business unit performance. The splits in the quarter 2 is in line with the previous quarters. Safe Storage is at 38% of the group, with a strong sales growth of 13% and an EBITA margin of just south of 8%.

Cash Management, 21% of sales, had a negative sales growth. Good sales growth in Europe but contraction in Asia due to tough comparison and in Americas where there's been a slow activity on some of the drive-up systems that we are having there. And EBITA margin of 8.9%.

Entrance Control, 20% of sales, 22% sales growth, very strong sales growth and then improved margins. And Integrated Security, 21% of the sales and a flat sales growth, 0% in EBITA, which is an improvement from the minus 1.4% prior year.

If we then go through the business units a little bit in detail. Safe Storage, as I said, strong development in all regions gives double-digit growth in both order intake and sales. And also, sales of safes to global manufacturers of ATMs continued to show a strong development. So we can see the global sales growth with both -- of ATM Europe, U.S. and APAC. And here, we can see that we need to address -- continue to address our overhead cost, and that's what we do in the -- as one part of the cost-efficiency program.

Looking at some of the order intake highlights. It's a broad-based growth, and we had several interesting orders in Spain where the bank improved the customer services with the largest automated safe deposit lockers, SafeStore Auto, in the country.

Italy. Italian Institutions wants to increase security and efficiency and invest in security cabinets equipped with electric locks from Gunnebo.

Continued good level of order intake of automated safe deposit lockers, SafeStore Auto, throughout Europe. And in China, security service company located in Haimen City purchased automated safe deposit locker solution also, SafeStore Auto Maxi, the largest one we have, to provide Safe Storage services in the city.

And in India, 2 of the country's largest private sector banks showed continued trust in Gunnebo and placed order for currency vaults and deposit lockers for new branches in the quarter. And also, in the U.S., JPMorgan continues to roll out its strategy to open up new branches and trusts Gunnebo under the Hamilton brand to supply solutions for safe storage.

On the marketing highlights side. It's a nice [thought] of our new luxury safe, Opulent, which we have started to sell. We also have automated safe deposit lockers, SafeStore Auto, successfully introduced on the Korean market, and the first order has been recorded.

Cabinet protecting data from electromagnetic pulses, EMP, introduced into customer segment Telecom in Europe, is a good example of how the business unit is actively seeking to extend its sales into new market verticals.

And then as I said, the niched but growing part of the global safe market is the luxury segment, and we launched Chubbsafes Opulent, which is a beautiful safe and high security -- with high security levels.

Coming then into Cash Management. The order intake was down by 5% year-on-year and 9% in constant currencies, and sales was down by 3% and 6% in constant currencies, where order intake and sales in Europe grew in the quarter. But in APAC, Middle East and Africa and Americas, order intake and sales contracted into phasing of projects, tough comparisons from last year and low activity in the U.S. of the drive-up systems. Due to the lower sales, our fixed cost charges was negative in the quarter and then also affected the results and hence the volumes.

Some order intake highlights from Cash Management. In Netherlands, the cash-in-transit company, RCCS, places major order for deposit solutions to be installed at their retail customers.

In Spain, a system integrator is establishing business in Saudi Arabia to support retailers in the country to optimize cash management and places an order for recyclers.

France. Several French retailers continue to invest in closed cash management, placing orders for Gunnebo's SafePay solution.

In Middle East, a large CIT-company continues to buy a Gunnebo's cash management deposit solutions for continued rollout to retailers in United Arab Emirates.

And in The Netherlands, a Dutch cash provider turns to Gunnebo for upgrade of its installed base of deposit units, SafeBag.

And then on the business Unit Cash Management marketing highlights. We have launched and we see a nice picture of the new machine, the R8. It's a new generation of recycler, targeting retailers with large volumes of cash, that was successfully launched globally in the quarter, and it has attracted quite a lot of interest.

And then also Gunnebo's solution for closed cash management, SafePay, was introduced to the Brazilian market at the APAS exhibition in May. And it's interesting we put a lot of effort in modernizing our product portfolio, and this R8 is the first launch of the several launches that will follow in the coming quarters.

Business Unit Entrance Control. Both order intake and sales were strong in the second quarter. As anticipated, the order intake in constant currencies was up also at 14% year-on-year, 11% in constant currency. And the sales were very strong at plus 23% and 22% in constant currencies. Sales was good in all regions in the quarter, and with the strong sales, EBITA and margin improved as expected.

Some order intake highlights from Entrance Control. A German multinational conglomerate, headquartered in Munich, has placed an order for Gunnebo gates to control the flow of people in its brand-new R&D center. And here in Sweden, the Swedish airport corporation, Swedavia, continues to upgrade its entrance control at pre-security with gates from Gunnebo.

In U.K., a public research university and one of the fastest growing universities in the U.K. wants to regulate the flow of people to and from its premises, and at the same time, increase security for its students and staff by installing the Gunnebo SpeedGates.

In Korea, due to high reliability of Gunnebo's products and maintenance services, a leading multiplayer online games development -- developer put repeating order for SpeedGates to upgrade entrance control security at their headquarter in Seoul.

In China, as usual, several large metro orders have been placed as lines in the major cities, such as Kunming, Jinan, Zhengzhou, Qingdao and Chengdu in China installed Gunnebo's metro gates for control of people flow.

And also, South Africa, a large international airport in Southern Africa chooses Gunnebo for Automated Border Control with the supply, installation and commissioning of 10 Gunnebo ImmSec Gates at the immigration, which will reads the passport, in the second half of 2019, followed by a 5-year maintenance contract. And there's a lot of traction in the airport segment around the globe, but I think Gunnebo has really a good suite of products which is generating a lot of interest.

And from the marketing highlights then. The recent acquisition of the Czech Entrance Control company, Cominfo, and that will add some SEK 140 million in sales and good profitability as I mentioned earlier.

And in Entrance Control, we're very active on the trade shows. And in the quarter, the unit, among others, participated in UITP, one of the major global tradeshows in Europe targeting the public transport segment and the ICS (sic) [ISC] in the U.S. focusing on the market segment, public and commercial buildings.

And then last on Integrated Security. So in Integrated Security, order intake was down 9% and 10% in constant currencies in the quarter where sales year-on-year were flat as sales in the quarter was slower in Europe, flat in APAC and increased in Americas.

The EBITA result in the quarter was 0%, which is an improvement of SEK 4 million compared to the negative 1.4% in the second quarter last year. This is due to drastic cost control and effects of taking action from last quarter. We will continue to focus on improving the U.S. security business over time as communicated earlier and also part of the cost-efficiency program.

Some orders in the Integrated Security. In Italy, an Italian gas company places a major order on integrated security solution. In Spain, a Spanish bank has turned to Gunnebo for service as well as the installation of upgraded electronic security at its branches across the country.

In the U.S., J.P. Morgan turns to Gunnebo/Hamilton for when they want to reinforce security at its physical branches with security doors and partitions.

And in Brazil, one of the first stores to do online sales in the country, already, since 20 years back, is upgrading its solutions for loss prevention in existing stores as well as establishing new stores across the country where Gunnebo is its preferred supplier.

And in the Middle East, a strategic bank partner continuously places orders for Electronic Security and Entrance Control systems, now for refurbishing their existing branches in Sohar and Salalah in Oman.

And on the marketing side, the Brazilian business, focusing on loss prevention to retailers, participated in the APAS exhibition in May, where it launched several new solutions targeting the Brazilian retailers. And the business unit participated in a security and telecom event in Spain and a key meeting point for large engineering companies, security integrators and industry decision makers, resulting in interesting leads and prospect of customers.

And then we also have the first cloud-based Gunnebo business solution sale to a retailer in Sweden. This is where we have digitized our services, and we are now up in the cloud and can offer retailers various services. Over time, we should be able to offer all business units equal type of services.

With that, I hand over to Susanne.

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Susanne Larsson, Gunnebo AB (publ) - Group CFO and Head of Finance & IT [3]

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So good morning, everyone. So some summary of the quarter. The EBITA for the group ended at SEK 73 million compared to SEK 66 million last year, and the EBIT improved from SEK 68 million compared to SEK 52 million last year.

As Henrik has said, we see an increase in the overall profitability in the quarter when compared to last year, mainly coming from Entrance Control, which is offset by the decrease in cash management, coming mainly from the drop in sales of drive-up solutions in U.S., low sales in Australia and the phasing of deliveries in cash-in-transit partners in the Middle East.

For year-to-date, even though Entrance Control had a great quarter, this project business had somewhat slower start of the year, which could then not compensate for the weaker Cash Management.

IAC cost in the quarter amounted to minus SEK 3 million compared to minus SEK 9 million last year. The current year includes costs related to productivity charges which have been offset by the profit of the sale of -- of the profits in Portugal of SEK 15 million due to the IAC cost amounting to minus SEK 9 million compared to minus SEK 11 million last year, where last year also included the profit derived from the sale of South Africa property of SEK 10 million.

So looking at the growth of EBITA and EBIT, you have to conclude again that the EBITA amounted to SEK 73 million compared to SEK 66 million and SEK 120 million compared to SEK 132 million year-to-date.

EBIT amounted to SEK 68 million compared to SEK 52 million, while the year-to-date EBIT is SEK 108 million compared to SEK 110 million last year. The rolling 12-months was on the same level as full year 2018 and ended at SEK 263 million.

EBITA margin, as stated before, ended this quarter on SEK 5.3 million, which is the same level as last year. However, year-to-date, down 4.7% compared to 5.5% last year.

Explained from a cost component perspective instead of the business unit, I would like to highlight the EBITA increase. The positive EBITA effect of SEK 7 million is explained as follows: So first and outmost, the sales growth of 7% year-on-year has a positive impact on EBITA of SEK 26 million.

Structural effects explains SEK 9 million, including the effects of the implemented productivity measures as well as the effects of divestment of [businesses] in Spain and U.K. We had a positive currency effect of SEK 6 million and equal towards translation and transaction effects. And finally, the negative minus SEK 34 million in the other is mainly derived from the negative gross margin mix and the negative overhead cost development including inflation.

Year-to-date had a negative EBITA development of SEK 12 million, and with a sales growth basically coming from the second quarter, and increased savings also gives a positive effect. However, this was offset by the negative overhead cost development, which we now address through the cost-efficiency program just launched.

Moving on then. The finance [net] increased to minus SEK 17 million compared to minus SEK 12 million last year. Year-to-date, the finance net increased from minus SEK 25 million to minus SEK 41 million. The IFRS 16 lease effect is minus SEK 7 million year-to-date, and the rest is mainly derived due to higher interest expense on our extended financing and bank fee.

Tax expenses was high in the quarter, minus SEK 27 million compared to SEK 20 million last year. The effective tax rates was negatively impacted by an old tax case from 2012 that unfortunately was lost. This resulted in additional charge of SEK 10 million in tax cost, affecting both the quarter and the year-to-date number.

Net profit for the quarter amounted to SEK 24 million compared SEK 20 million last year and SEK 31 million compared to SEK 42 million for the year-to-date. Finally, earnings per share was SEK 0.32 in the quarter and SEK 0.41 year-to-date.

Moving on to cash flow. Our operating cash flow for the quarter was minus SEK 12 million compared to minus SEK 28 million last year. And year-to-date, it was SEK 36 million compared to SEK 32 million last year.

While the net cash flow is mostly impacted by the IFRS 16 adoption, the operating cash flow includes the add back or amortization of operating lease, the right of use asset, up SEK 28 million in the quarter and [SEK 65 million] year-to-date.

The decrease in operating cash flow is mainly driven by others and the change in working capital, which is offsetting the improved operating profit in the quarter.

Others includes a variety of items, including interests and other financial items paid, tax paid, pensions paid and noncash charges, and the main change in this quarter as well as the year-to-date is due to the adjustments of the noncash profit of the sale of property in Portugal of [SEK 15 million] and a higher finance payment.

Moving on to change in working capital. That has a less positive development during the quarter, and the main explanation to the negative development was strong sales in June increasing the accounts receivable and reductions in advance payment from customers as well as reduction in holiday tours. The change in working capital year-to-date was in line with last year, excluding the effect of discontinued operations.

Investing cash flow reflected the decreased level of investment when comparing to last year. While quarter 2 includes SEK 26 million of cash from the sale of Portugal property year-to-date, last year also includes proceeds from the sale of a facility in South Africa of SEK 30 million.

Finally, the free cash flow for the quarter ended at minus SEK 6 million compared to minus SEK 63 million last year, and year-to-date was plus SEK 21 million compared to minus SEK 24 million last year.

Then on the next page, we have a graphic illustration there illustrating the cash flow we have commented upon. The cash flow remains a key focus area for us, and we are including how we work with both receivables and overdue payments and their terms as well as inventory and the delivery planning.

Net debt/EBITDA then. The net debt, excluding pension liabilities and excluding the IFRS 16 lease effect, amounted to SEK 1,430 million at the end of quarter 2, which is an increase of SEK 91 million compared to year-end. The increase mainly caused increase in bank overdrafts and exchange fluctuations.

Pension liabilities were slightly higher this quarter, SEK 405 million compared to SEK 375 million at year-end. This increase is mainly related to the decrease in discount rate adoptions.

IFRS 16 leasing, as you know, was implemented at year-end. And then we added SEK 254 million financial liabilities to our opening balance net debt, of which SEK 223 million is the liability by quarter 2 end.

EBITDA then was SEK 378 million at year-end. Quarter 2, year-to-date, the rolling 12-months of EBITDA is SEK 491 million, including the IFRS amortization contributing to some SEK 180 million.

All in all, at year-end, we had a net debt, excluding pension divided by EBITDA, of SEK 3.5 billion. At quarter 2, we ended at SEK 3.4 billion, including the annualized amortization effects of IFRS 16 and lease effect was impacting us with a positive 0.4.

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Henrik Lange, Gunnebo AB (publ) - President & CEO [4]

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Okay, thank you, Susanne. And then on the group targets and outcome. And what is positive in quarter 2 as well as the quarter 1 is the strong sales growth and a strong order intake growth. We have an EBITA of 5.3%. The net debt to EBITDA, as Susanne said, of 3.4% compared to our target of 3.5%.

And then if we can turn to the financial calendar part and as a concluding remark from myself. Just to note that the quarter 3 report has been changed today to the 6th of November, subject to us making the share Rights Issue, so that would be 6th of November 2019.

So in summary then, the second quarter of 2019 has been a quarter of improved focus on the new structure, and I am satisfied that we have a strong order intake and sales in the quarter. We have an improved EBITDA as a result.

We are very happy to welcome the Cominfo team into Gunnebo. This is an acquisition which will help us to probably grow in the highly profitable Entrance Control business units.

And in relation to the acquisition, we have then proposed a guaranteed Rights Issue to strengthen the balance sheet going forward. And we are on the journey of change and are satisfied with the progress, and therefore, we have planned for the full rollout also into APAC and Americas of the business unit concept.

And we see good traction in order intake and customer focus, as planned, and we experienced a lower gross margin and lower S&A percent of sales in Q2, including the reclassifications.

And we have announced a cost-efficiency program to accelerate the margin improvement going forward and also announced a leaner management team as for year-end to be fully implemented by year-end. And I'm confident that all these changes with the new way of working will generate profitable growth over time.

With that, I thank everybody for listening, and I open up for Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question from Mr. Kenneth Toll from Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [2]

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Yes. So I was wondering, last year, you did some smaller divestments in the Integrated Security division. Are you looking to do more of those?

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Henrik Lange, Gunnebo AB (publ) - President & CEO [3]

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Thank you, Kenneth. As I've said, the focus of creating the regional and global strategies to roll out is for Safe Storage, Entrance Control and Cash Management, with an -- integrated is a series of assets which we manage asset to asset. And as I've said earlier, the intent is that, that part of Gunnebo will be smaller over time. We are working with improving the profitability of what we have and also looking at what our options are going forward.

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Operator [4]

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(Operator Instructions) We don't have any questions for the moment. Let's wait 1 minute to have questions.

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Henrik Lange, Gunnebo AB (publ) - President & CEO [5]

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I think if there are no more questions, then we conclude. We are available to answer any questions after the meeting if anybody wants to call us.

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Operator [6]

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We don't have any question. A small conclusion, maybe?

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Henrik Lange, Gunnebo AB (publ) - President & CEO [7]

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Yes. So then, thank you all for taking the time during a lovely summer day in Sweden to call in and listen to the Gunnebo results. It's been a very busy quarter. Some changes going forward, and I am confident that we are on the right path for the future. So thank you very much and looking forward to talk to you again in the quarter.

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Operator [8]

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Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for your participation. You may now disconnect.