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Edited Transcript of ING.PA earnings conference call or presentation 3-Feb-20 6:15am GMT

Preliminary Q4 2019 Ingenico Group SA Earnings Call

Puteaux Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Ingenico Group SA earnings conference call or presentation Monday, February 3, 2020 at 6:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Pierre-Kahn

Worldline S.A. - Head of Investors Relations

* Eric Heurtaux

Worldline S.A. - CFO

* Gilles Grapinet

Worldline S.A. - Chairman & CEO

* Matthieu Destot

Ingenico Group - GCS - EVP of Banks & Acquirers Business Unit

* Michel-Alain M. Proch

Ingenico Group - GCS - CFO

* Nicolas Huss

Ingenico Group - GCS - CEO & Director

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Conference Call Participants

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* Charles Brennan

Crédit Suisse AG, Research Division - Research Analyst

* Hannes Leitner

UBS Investment Bank, Research Division - Equity Research Analyst of Software

* Sébastien Sztabowicz

Kepler Cheuvreux, Research Division - Head of Tech - Equipment Research

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Presentation

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Nicolas Huss, Ingenico Group - GCS - CEO & Director [1]

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Good morning, everyone, and welcome to this conference call to discuss our full year 2019 results announced today. I am Nicolas Huss, the Ingenico CEO; and I'm joined here today by Michel-Alain Proch, our group CFO; and Matthieu Destot, our B&A leader, who will help me with the presentation. With us in the room to participate to the Q&A session, we also have Gabriel de Montessus, our Retail Leader.

Michel-Alain and I are going to briefly walk you through the key highlights and the performance of our 2 business units since the beginning of the year, the full year numbers and the guidance for 2020. Matthieu will then present the new payment Platform as a Service initiative we currently launched. But before moving to Slide 3, let me sit on the fact that the topic of this call is our full year results, and we will not comment or take questions regarding the operation with Worldline. That will be detailed in another call at 8:30 a.m. CET today.

Moving now to Slide 3, where I would like to first highlight the key operational events. So starting with Retail. Last year was fully in line with our expectations with a steady 11% organic growth over the period. All business lines have delivered as expected with Enterprise having a strong double-digit performance, benefiting from a very good momentum on both transaction activities and POS. Global Online growth is cruising speed. Payone benefited from an on-track integration success and accelerated growth during the second half of the year and SMB growing at a low double-digit with a fourth quarter impacted on gross revenue points by the decrease in interchange fees in Europe. But on a net revenue basis, the organic SMB growth is fully in line with our expectation at 15%. Regarding B&A, the euro has been pretty dynamic, [least to say], with a 10% organic performance above our expectations.

Maybe a few highlights that during the quarter, we have benefited from a solid recovery in North America, fueled by ISV certification ramp up and EMV renewal cycle. Latin America remained strong all across the year with a Brazilian market, where we have gained market share and deployed APOS across the main local players. APOS has shown a moderate growth as expected, despite a strong growth during the first half due to specific phasing of the orders in China. We have discussed that quite a lot in different calls.

Finally, EMEA's performance was soft, mainly driven by volatility in Eastern Europe, where we have recently implemented a new organization. Globally, 2019 has been solid in both businesses, reflecting the first benefits of our fiscal growth program execution.

Now moving on to Slide 4 for the key financial highlights of the year. So let me first provide a summary of the key 2019 figures before Michel-Alain dig into more detail. During the year, we have exceeded all of the parameters of our guidance. We have reached EUR 3.370 million in gross revenues, up 27%, fueled by both organic growth, plus 10%; and of course, by the integration of Paymark and BS Payone, the latest being done without cash consideration. Our EBITDA came up at EUR 606 million, representing an 18% margin with a slight contraction in B&A due to the geographical mix offset by a strong operating leverage within retail.

During last year, thanks to Michel-Alain, we have as well put a strong focus on our cash, allowing us to deliver EUR 310 million of free cash flow, representing a 51% conversion rate above our full year guidance. Our net-to-EBITDA ratio came at 2.2, down from 1 -- 3.1 in December 2018. Thanks to the strong free cash flow generation that I just mentioned. Globally, these figures reflect what we have initiated in the frame of the strategic plan presented a few months ago, repositioning Ingenico to deliver our midterm ambition.

So moving on to Slide 5 now. Let me cover the key achievements this of Fit for Growth plan during last year. We have executed this year the first pillars to deliver our mid-term EBITDA impact target of EUR 100 million. Let's start first at group level. After the definition and the calibration of our targeted operating model, we now start in 2020 to implement the rationalization process of our ERP landscape. In the meantime, and it is the starting point for the ERP work stream, we have completed end of 2019, the legal reorganization with the creation of 2 subgroups, 1 for B&A and 1 for Retail, as announced last April 2019. And lastly, the other initiatives such as data center rationalization, procurement contract renegotiation and outsourcing offshoring processes are ongoing and on track to deliver the expected savings.

Now moving to the retail part of the Fit for Growth, the acceleration program based on dedicated growth initiatives. We have successfully launched Bambora Connect within SMB this year, providing an all-in-one solution for ISVs, and we now start to roll out a new initiative to provide our acquiring offering to existing merchants in the Benelux region. We have expanded our offering within enterprise to address specific verticals, such as the self-service with solutions combining acquiring capabilities. We have pursued the verticalization and international expansion of Global Online and the benefit from the partnership we have with the German selling banks converting their customers to Payone payment solutions, which continues to gain traction.

Lastly, on B&A Revival. As you know, we have launched several initiatives repositioning the BU during the year, and we are on the trajectory of the expected benefit. Part of our Android development strategy, the Android Competence Center in Vietnam is now developing more than 2,500 payment apps to serve the international market. It's now up and running as I was saying. We have pursued the rationalization of our product references and have update -- decommission's just got 60% of references. You might remember that at the end of June 2019, we only were at 20% of references decommissioned. The rationalization of our EMS footprint is now completed, allowing us to improve purchase performance versus last year. And finally, the global accounts initiative that we have launched early this year -- sorry, early last year, in this case, delivered well with a strong double-digit organic growth for this bigger account.

Summarizing, all of these initiatives across the group puts us in a position to accelerate organic growth, but also, at the same time, optimizing B&A before repositioning, which is what you will see in a few minutes. And last, redesigning our group operating model. As expected, through these initiatives, we have delivered this year a EUR 20 million EBITDA impact and are completely in line with the announced mid-term trajectory to deliver the EUR 100 million of EBITDA impact in 2020.

With this, let me pass on to our CFO, Michel-Alain, who will share with you more details on the full year performance.

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Michel-Alain M. Proch, Ingenico Group - GCS - CFO [2]

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Thank you, Nicolas, and good morning, everybody. So on Slide #7, you'll see the main figure for each business unit. During the year, as Nicolas said, we've delivered EUR [3.370] billion revenue. This is up 10% organically. When I exclude the interchange fees, the net revenue reached EUR 2.9 billion with an organic growth of 11%. I will come back to that later on in the presentation. EUR 606 million of EBITDA. It's a margin of 18%. And on the net revenue, it's a margin of 21%.

Excluding IFRS, when I look at the EBITDA margin, we have achieved a performance which is almost stable compared to year 2018 pro forma. With the compensation of our geographical mix, margin decreased by our OpEx Fit for Growth action plan.

So if I first focus on Retail, EUR 1.9 billion revenue, 11% organically. And in net revenue, excluding interchange fees, 12% organic growth. EUR 301 million of EBITDA. This is overachieving significantly our guidance. And excluding IFRS, EBITDA margin is up 10%. You see the split by business line, 18% SMB, 30% Global Online, 22% Enterprise and 30% Payone.

Two points that I would like to highlight. First, that the organic growth is completely consistent with our midterm trajectory. And so one that we have benefited during the year of the operating leverage derived from that growth, and I will get back to that in the next slide.

Now you have in Appendix, our Q4 performance, I want to give you a bit more granularity on this Q4 performance. SMB had a soft quarter in gross revenue, and this is mostly coming from the impact of interchange fees, namely SMB grew by 7% in gross revenue in Q4, but in net revenue by 15%, 15%, which is fully in line with our expectation.

Global Online is -- has grown 11 -- 9% in gross revenue, but 12% in net revenue as Global Online is affected, too, by the interchange effect. Payone is up organically in Q4 by 7%, and that's even 11%, so double-digit in Q4. We saw continuous strength of merchant conversion from the savings banks customer and the rollout of our full-service offering. And finally, Enterprise was up 17%. And here, there is no difference between gross revenue and net revenue as there is new acquiring activities.

So if I move on now to B&A, B&A closed the year with EUR 1.4 billion, which is a 10% growth, an EBITDA of EUR 305 million, fully in line with our expectation, 21% margin. Excluding IFRS, EBITDA margin is down 130 basis points, and this is due to the geographic earnings as we expected it. And that with our Fit for Growth program and the recovery of North America, we have been able to mitigate this effect with an EBITDA margin down 90 bp in H2 versus 170 bp in H1. So as you can see, the situation is improving.

Regarding the fourth quarter performance, I would like to mention the following: first, a very strong recovery of the North American market. So it was already the case in Q3. It's even more the case in Q4 with 31% growth. A steady performance in Latin America; maybe you remember that we were thinking that Latin America was going to level, when actually we posted 25% of organic growth. EMEA is down 6%, which is still impacted by Eastern Europe as in Q3, but it's fully in line with our expectation. And finally, Asia Pac is down 18% due expectation with the Chinese market, which is challenging. That's partially offset with good growth in the other parts of Asia.

Finally, I'd just like to point out that you can see now that we have almost a CapEx balance in terms of EBITDA generation between the 2 BUs. So if I move on to Slide #8, and starting with Retail, showing you the building blocks of our EBITDA. EBITDA is derived, first from our organic performance, which -- representing EUR 35 million, which is above our initial expectation. And here, you can see the operating leverage that I was mentioning at the beginning of the year at play. As expected, we have invested EUR 9 million into our growth initiative and the Fit for Growth program has derived a savings of EUR 5 million. And finally, IFRS 16 final impact for Retail is EUR 20 million. So all this is getting to EUR 301 million.

Now for B&A, the main building blocks of the B&A EBITDA deployment are the following: first, as we expected, we experienced an EBITDA contraction of EUR 21 million, which is coming from the country mix that I already mentioned, which is basically an unfavorable geographical mix, mainly driven by the 63% organic growth in Latin America and some isolated price pressure. Again, fully in line with our expectation. We have captured EUR 20 million of EBITDA improvement due to this over performance in revenue in Latin America and Asia. As you remember, maybe, it was mainly in H1. And in the meantime, in line with our B&A revival plan, we've been able to derive EUR 29 million of positive EBITDA impact through our Fit for Growth program. So -- and finally, we've invested into our Vietnam Competence Center in Hanoi for EUR 5 million. IFRS is coming at EUR 13 million. So altogether, EUR 305 million for B&A.

If I move on to the next slide, which is presenting our preliminary unaudited results. If I go through now the income statement, I begin with gross profit. The gross profit has reached EUR 1.240 million. This is gross profit rate of 36.7%, excluding IFRS, versus 38.6% in '18, such a decrease of 190 bps, which I mentioned already. And you see that this 190 bp is almost fully compensated by the work we've done on the OpEx. OpEx is at EUR 662 million, which is 19.6% of revenue versus EUR 643 million last year, [21.1%] of revenue. So we are able to compensate through our Fit for Growth actions 150 bp out of the more than 190 bp that I was mentioning, which, at the end, managed to mitigate the impact in the EBITDA margin by 40 BP and posting EUR 606 million that as I was mentioning and 18% on gross revenue. Finally, our net profit -- net income book share is reaching EUR 208 million, which is an improvement of 11% compared to last year.

Now moving to the free cash flow. Slide 10, you know that's been a strong focus for me and for the team throughout the year. So as a consequence, we put in place 13 reinforced financial controllers on all the different elements of free cash flow, a true cash future, both in the finance function but with a strong bond with operation. And when we look at the number, obviously, the major lever in the improvement of the free cash flow is the EBITDA, as you can see it. I would like to mention stabilization of the working capital, despite the 10% growth. Then CapEx reached EUR 135 million, which is fully in line with our financial discipline to have CapEx below 5% of revenue. OIE are under control. As you remember, we committed to EUR 40 million and we come in line with EUR 42 million.

As for the tax, you may remember that we had one-off reimbursements of the French tax, sorry, in H1 of EUR 25 million, which explains why the tax is at EUR 65 million. So all in all, the free cash flow conversion rate is 51%, which is above our guidance. And even if when I'm taking out the one-off reimbursement of tax, our cash conversion is 50%. So it's 1 point of improvement compared to last year.

Next slide is showing you the bridge of net debt. So the group net debt decreased to EUR 1.3 billion against EUR 1.5 billion at the beginning of the year. It's clearly a steady deleveraging of the group, as we have committed. Major element is, obviously, the EUR 310 million free cash flow generation, EUR 66 million negative net coming from the Paymark acquisition and impact of our health care trends disposal. And finally, the EUR 40 million dividend payment in cash.

So as you can see in this -- on this slide, our net debt now is representing a leverage ratio of 2.2x EBITDA, which is one-time -- almost 1 time less, 1 round less than the beginning of the year. On this, I'm leaving the floor to Matthieu, who's going to present you the launch of the PPaaS platform.

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Matthieu Destot, Ingenico Group - GCS - EVP of Banks & Acquirers Business Unit [3]

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Thank you, Michel-Alain, and good morning to all.

So today, B&A is announcing the launch of the next step of this strategic plan with the Payments Platform as a Service, PPaaS as just explained by Michel-Alain. So this new solution fits perfectly with the need to transform an installed base of payment acceptance devices by creating the new digitalized commerce experience. With this initiative, B&A is repositioning the acceptance value chain by proposing an open API-driven payment platform offered as a service to the entire ecosystem being banks, acquirers, ISOs, ISVs or fintech players. It will allow B&A to become the ecosystem enabler of integrated business and payment solutions.

By creating a secure and flexible cloud-based payments with a rich set of APIs and value-added services platform, Ingenico is solving the key pain points of our customers: Number one, providing a global and scalable platform to support our customers in a consolidated market that tends to become global; second, we designed to ease the development of verticalized and cross-channel integrated solutions by leveraging the platform API; third, we provide a platform of choice to route omnichannel transactions and provide aggregated data analytics, thanks to the Ingenico undisputed technology solutions and services tech; and finally, by operating the cloud platform, we have reduced the IT and operations cost of our customers by providing an as-a-service business model, we offer the flexibility of subscription packages and API-based consumption model to bring the price competitiveness expected by our customers.

This initiative is a key milestone for Ingenico B&A, becoming a technology enabler of payment acceptance for the entire ecosystem and a key step towards a recurring revenue model. To deploy the PPaaS initiative, B&A will dedicate up to 100 headcount by the end of this year and invest the first tranche of EUR 10 million in 2020 to first serve the ecosystem development and get the cloud platform live with customers on-boarding their own merchants by the first half of 2021.

Now moving to Slide 14. You see that Ingenico B&A is engaged in the journey of a progressive transformation towards recurring revenue. In 2019, we have launched the first wave of our transformation with the implementation and execution of the B&A revival plan. B&A has delivered a solid profitable growth through the ramp-up of TETRA devices, representing roughly 80% of our proprietary OS terminals revenues. The internationalization of business-centric open terminals Android base is representing now 17% of our hardware revenues, and it is gaining good traction.

Our industrial capabilities have been adapted with 1 worldwide production site, complemented by our Brazilian capabilities and our new client-centric organization with a global account structure and solutions-oriented sales organization delivered the expected growth in 2019. In parallel, B&A has already engaged the second wave of its Fit for Growth initiative, named [Boosts], with a geographical and solution expansion of its Android [at play]. In 2020, we will leverage our worldwide Android R&D competency center, with more than 25 payments apps under development based upon the same core architecture. This unique capability is offering Ingenico the ability to rapidly expand with new Android-based terminals in EMEA and North America regions. By initiating a flexible Terminal as a Service solution, we are offering a full suite of services, such as field and remote support services, terminal life cycle management through customized software development and evaluative maintenance to our B&A customers with a complete managed service of their terminal state.

Finally, in 2020, with the launch of the payment platform strategic initiatives, Ingenico is starting the third wave of the transformation from hardware to software services to 1 cloud and as-a-service business model. B&A is opening a new era from a hardware-centric payment acceptance model towards the recurring as-a-service revenue model and expect, in the coming 5 years, to derive 50% of this activity from recurring revenues versus 15% in 2019.

Moving on the next slide. So through the creation of secured and flexible cloud-based payments and value-added services platform, Ingenico B&A is positioned as an ecosystem technology enabler and provide to its customer: first, a global and scalable platform, offering a full suite of services without the burden of the complete infrastructure investments depending on their existing assets and geographical targets of customers will benefit from the modularity of the platform and our global scale. We are providing a seamless deployment of verticalized and cross-channel integrated solutions through API, the deployment of new use cases by verticals or adding a new payment means will become a question of days or weeks, rather than quarters or years currently.

By routing omnichannel transactions and aggregating data analytics, we will provide access to our customers toward aggregated data analytics to enable their merchants with the ability to sell more to their consumers. A hardware-agnostic platform to transform smoothly the existing installed base and, at the same time, of onboard new devices with the new form factors, such as smartphone, tablet or IoTs; and finally, a flexible offering with subscription packages and API-based construction model depending on the depth of use of the platform and the consumptions of the API our customers will pay per use.

Ingenico is uniquely positioned to lead this industry transformation towards payments Platform as a Service. Thanks to its undisputed installed base, more than 35 million terminals to transform; our global presence in more than 170 countries in which we accept more than 1,000 local, global and alternative payment methods, which will be simply called through APIs in the future. By committing to a local API-driven platform, Ingenico B&A is partnering with hundreds of ISVs to integrate the business apps and payments needs of the merchant. With this payments Platform as a Service initiative, Ingenico is repositioning itself as the ecosystem enabler of choice for all [POS partners] . Within 5 years, we aim at migrating with our partners, 50% of the client base to PPaaS or Terminal as a Service offering, doubling the portion of recurring revenue and protecting future margin profile at current level, meaning circa 22%

Now I would like to pass on Michel-Alain.

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Michel-Alain M. Proch, Ingenico Group - GCS - CFO [4]

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Thank you very much, Matthieu. So we are going to move to the guidance. And before doing this, I would like to highlight the key evolution on our reporting format. As a result, the group operating model redesign, we implement a new reporting format to provide a better measure of both division performance aligned with European and American market practice, and by the way, with our Worldline colleagues. .

The new format impacts 2 financial aggregates: first, the revenue. We will now present our figures on a net revenue basis, impacting only Retail. Our net revenue definition is gross revenue less interchange fees. And secondly, the EBITDA, we will now identify the corporate cost and provide you with the business unit, EBITDA, excluding corporate costs on a separate line. You will find in Appendix of this presentation the net revenue bridge for all the retail business line for year number in 2019 and the business unit EBITDA, excluding corporate costs as well. This new reporting format means that now our organic growth guidance is based on net revenue and that our EBITDA guidance will include 3 components: B&A; and retail EBITDA; and, obviously, the corporate costs. So moving on to slide #18, which will show you the bridge between what we call the old format to the new format. You see that in year 2019, interchange represented EUR 475 million, obviously, only located in the Retail business unit. So the '19 group organic performance on a net revenue standpoint was slightly higher with 10.9%, with Retail growing 12.2% on a net revenue basis, and obviously, no impact on B&A.

On the EBITDA side, as mentioned, we have identified the corporate cost, which is leading to EUR 330 million of EBITDA for B&A, EUR 326 million for Repair and EUR 50 million of corporate costs. Last point to mention, it's obvious that our new reporting format implies no change on the free cash flow regarding the 2020 guidance.

Now I give you the floor, Nicolas.

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Nicolas Huss, Ingenico Group - GCS - CEO & Director [5]

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So for the sake of time, I'll go very quickly through the guidance, and then we'll open to question and answers.

So the guidance is pretty straightforward, actually. If you look at it from a group level perspective, we have -- we anticipate 4% to 6% organic growth, an EBITDA above EUR 650 million and a free cash flow conversion rate, which should be above 50%. If we go slightly deeper, BU -- for BU, what we expect is B&A, organic growth between minus 1% and plus 1% and an EBITDA of EUR 330 million. At Retail level, we see a double-digit organic growth and an EBITDA that will be above EUR 365 million. Our corporate costs of circa EUR 45 million will be down EUR 5 million versus 2019.

This year, we will, of course, continue to execute our Fit for Growth program, and we expect, on top of the EUR 5 million corporate cost reduction, to deliver another EUR 40 million of savings at BU level, pushing the total savings to EUR 45 million in 2020. This figure is, of course, factored in our guidance. On top of that, we will continue to invest with an added EUR 10 million investment in B&A on the Payment Platform as a Service initiative that Matthieu just presented.

If it's fine with everyone, to give some time for the questions, what I think is that you will see that we have put the traditional bridge EBITDA slides and cash on the Slides 21 and 22. And we would be more than happy now to answer to any question that you would have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have one question from the line from Sebastien.

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Sébastien Sztabowicz, Kepler Cheuvreux, Research Division - Head of Tech - Equipment Research [2]

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Sebastien from Kepler Cheuvreux. I just wanted to understand a little bit the dynamic that you see in the B&A business for 2020. Which kind of growth do you see in the different, I would say, region? And also specifically in China, what do you see in this market because it seems the economy could be very slow due to the Corona virus. Any, I would say, explanation would be quite helpful.

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Nicolas Huss, Ingenico Group - GCS - CEO & Director [3]

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Thank you, Sebastian. Michel-Alain?

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Michel-Alain M. Proch, Ingenico Group - GCS - CFO [4]

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So Michel-Alain speaking. So for B&A, as a whole, regarding minus 1 to plus 1 is a split by large geographies. For EMEA, we think we will be in the low to mid-single growth. So EMEA, coming back to growth in 2020. In APAC, including China, low single decline. In Latin America, low double decline after the performance, obviously, of year 2019. And for North America, we carry on the recovery, we submit to high single growth. On the Corona virus, I leave the floor to Matthieu. Matthieu?

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Matthieu Destot, Ingenico Group - GCS - EVP of Banks & Acquirers Business Unit [5]

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Yes. So we -- on the Corona virus crisis, we have an ongoing plan to first secure our activities on the domestic market in China. And second, to secure our procurement of components coming from China that, as you know, we are producing in China and in Brazil. So, so far, we do not see an impact on our Q1 and H1 results, but we are following this on a day-to-day basis with a very strong operational plan.

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Nicolas Huss, Ingenico Group - GCS - CEO & Director [6]

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And once again, what is produced in China, Matthieu, is only the Android part of our business.

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Matthieu Destot, Ingenico Group - GCS - EVP of Banks & Acquirers Business Unit [7]

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Yes. Exactly.

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Nicolas Huss, Ingenico Group - GCS - CEO & Director [8]

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Not the -- that's right.

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Matthieu Destot, Ingenico Group - GCS - EVP of Banks & Acquirers Business Unit [9]

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Exactly.

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Nicolas Huss, Ingenico Group - GCS - CEO & Director [10]

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Okay. Another question?

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Sébastien Sztabowicz, Kepler Cheuvreux, Research Division - Head of Tech - Equipment Research [11]

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If you can do the same exercise with the retail business, where do you see the different, I would say, division evolving for 2020? Are you expecting the SMB business to be back to a sustainable 15% growth? And also for the other division, any trends will be quite appreciated.

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Michel-Alain M. Proch, Ingenico Group - GCS - CFO [12]

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Yes. So thank you, Sebastien. Yes, sure. So as you've noticed, we are guiding double-digit for retail exactly as this year and fully in line with our midterm ambition. If I take each BU, one after the other, I begin with SMB because I want to mention that SMB, again, in net revenue, very important, in net revenue is 15% of growth, 15% of growth in Q4 so there is no deceleration here. And we expect SMB to be mid-teens in 2020.

As far as Enterprise is concerned, we think we will be in the range, 5% to 7% after the particular performance we had with health care of Germany in year 2019. As far as Global Online is concerned, which has been delivering extremely steadily each quarter, we think the growth will be in the low double digits. And finally, Payone, as you have seen, has accelerated its growth throughout the year, quarter-after-quarter, finishing, by the way, net revenue at 11%. And we see a range of 8% to 10% in 2020. So all of that doing the double digits that we are guiding on.

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Operator [13]

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At the moment, we have no further questions.

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Nicolas Huss, Ingenico Group - GCS - CEO & Director [14]

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Okay. So I believe that then, we would finish just in time. .

Thank you, everyone, and I think that we'll leave the line open for the following call.

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Michel-Alain M. Proch, Ingenico Group - GCS - CFO [15]

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Yes, please. All, could you please, please stay on this line because this line will be used for Worldline to present as well its preliminary 2019 full year results in a couple of minutes. So please bear with us. Just to wait for -- to join that call. Thank you.

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to today's Worldline 2019 preliminary results call. (Operator Instructions) I must advise you that this conference is being recorded today, 3rd of February 2020.

Without any further delay, I would now like to hand the conference over to your presenter today, Gilles Grapinet. Please go ahead.

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Gilles Grapinet, Worldline S.A. - Chairman & CEO [2]

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Thank you, operator. Ladies and gentlemen, good morning. This is Gilles Grapinet speaking, and thank you for attending this Worldline Conference Call today on our 2019 Full Year Results. I am going to share this rather quick presentation because we have another piece of news for today, as you probably have noticed.

On our 2019 unaudited numbers, with Eric Heurtaux, our Group CFO; and as usual, Marc-Henri Desportes, our Deputy CEO.

Moving to Slide 4. I am really very proud to report today our first set of annual results, fully including the contribution of 12 months with SIX Payment Services for the first time. This is, as you see, another very solid year for the new Worldline, which is perfectly in line with the objective that we have set for the year. Overall, 2019 was a pretty, pretty active year for Worldline, both from an operational and a strategic standpoint.

From an operational standpoint, our organic revenue growth reached a very solid plus 6.9% in 2019. Incidentally, our best performance ever since we are listed, fully in line with the anticipated growth profile and acceleration during the year. All our strong business lines recorded a very good growth performance and not only merchant services growing above plus 8% during the second half of the year. Many commercial successes were recorded this year, again, with new customers in all 3 business lines. Operationally, I can also confirm the strong momentum on SIX Payment Services integration, which is still running extremely well. The synergies expected for 2019 were fully delivered, and the plan is running faster than we initially anticipated.

More fundamentally, in 2019, Worldline has improved massively its strategic maneuverability at a decisive moment of the acceleration of the European consolidation in payments. Thanks to, as you know, the deconsolidation from Atos, the full control of our processing factory equensWorldline, which is the largest one in Europe, and the access to attractive financing conditions through our BBB investment-grade rating received from S&P.

Let me now, onto Slide 5, briefly present the key figures of this full year. Revenue for 2019 was EUR 2.382 billion, representing, as I said, an organic evolution of plus 6.9% compared to 2018. Revenue growth accelerated as planned during the year with plus 7.3% in H2 2019 and plus 7.5% in the fourth quarter of the year. Regarding profitability, our OMDA stood at EUR 602 million or 25.3%, representing an increase of plus 240 basis points compared with 2018 in the upper end of the objective bracket set for the year of between 24.8% and 25.8%. 2019 free cash flow was EUR 288 million, representing a plus 38.6% increase compared to last year and very close as well to the upper end of our guidance bracket, which was EUR 290 million.

Net debt was EUR 641.3 million compared to a net debt of EUR 35 million at the end of '18. Eric will walk you through the evolution of the net debt in a moment. But as you know, this increase is largely due to the acquisition of the minority stake in equensWorldline in September '19. At the end of the year, our net debt represents 1.1 OMDA pre-IFRS 16 OMDA, which leaves us significant remaining cash firepower.

Let me now give the floor to Eric, who will walk you through more detail on these figures. Eric, the floor is yours.

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Eric Heurtaux, Worldline S.A. - CFO [3]

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Yes. Thank you, Gilles, and good morning to you all. As usual, let me start by presenting to you the 2018 numbers I will use in my presentation. As you know, we measure our performance at constant group and foreign exchange rate and, therefore, to look like-for-like comparison of revenue and OMDA, 2018 numbers have been adjusted to take into account the acquisition of SIX Payment Services -- the addition of SIX Payment Services in this group, the appreciation of the Swiss franc, partly compensated by the depreciation of the Argentinian peso in the FX effect. This bring constant scope revenue for 2018 at EUR 2,228.1 million and OMDA at EUR 471.9 million.

Before going into further detail by global business line, just an overview of our financial performance in 2019, which has been very satisfactory. Worldline revenue has been growing 6.9% organically in 2019 to reach EUR 2.382 billion. Our revenue split reflects the new business mix of online plus the SPS acquisition with Merchant Services being now the largest business line at 47% of total revenue, followed by Financial Services at 39% and Mobility and e-Transactional services at 14%. The presentation of the 2019 OMDA performance has to take into account the adoption of IFRS 16 on leases from January 1, 2019.

First, OMDA reached EUR 602.1 million or 25.3% of revenues, as you can see on the screen. This number includes positive impact of the adoption of IFRS 16 of EUR 41 million or 170 basis points. On a like-for-like basis, OMDA improvement represents 240 basis points compared with 2018. Let me now detail this number by GBL, each of them having strongly contributed to the performance of the group.

Starting by Merchant Services, revenue grew by 6.6% organically or EUR 68.9 million, and reached EUR 1,119.4 million. Commercial Acquiring grew double digit, benefiting particularly from: first, the fast in-store transaction volume growth figure notably by the increased usage of [car] payment for low-value purchase and the rapid adoption of contactless payments; second, the continued strong increase of e-commerce payment transaction by particularly with successful deployment of commercial offers specialized by market verticals; last, solid volume growth on value-added services, such as Dynamic Currency Conversion.

Revenue in omnichannel payment acceptance grew high single digits, mainly driven by additional volumes and new customers in France, Switzerland, Austria and large international customers. Sales in payment terminals decreased overall in 2019. Revenue, nevertheless, recovered during the second semester and was mainly stable as planned, enjoying a higher demand for newly launched products, mainly the new VALINA terminal and from synergies with SIX Payment Services.

Merchant Digital services, which is the smallest business unit of merchant services, decreased slightly, mainly due to the lower sales of digital kiosks in the U.K. Growth in merchant services remained globally very strong, notably for Acquiring and Acceptance services and have reached close to 10%, excluding payment terminal and even beyond 10% in Q4.

OMDA was up 500 basis points at the end of December 2019 compared to the same period last year and reached EUR 265.3 million or 23.7%, thanks to good mixes, momentum in commercial wiring and omnichannel acceptance, positive effect of the realized synergies of the combination with SIX Payment Services in accordance with the joint business plan and the impact of transversal productivity improvement actions coming from our TEAM2 initiative.

In financial Services, revenue reached EUR 918.4 million, improving organically by EUR 51 million or 5.9% compared to 2018. Account payments revenue grew double digit, benefiting from good SEPA payment collection volumes in Germany, Italy and the Netherlands. In addition, the division benefited from the ramp-up of a large commerce model sourcing contract signed in 2018. Digital banking division revenue grew double-digit as well, thanks to good business plan, in particular, related to PSD2 compliance. Issuing Processing grew high single digits, thanks mainly to good growth in volumes of account payment, continuous increase of 3D secure and strong authentication transactions and revenue recognized on payment software licenses.

Despite a recovery during the second semester, Acquiring Processing revenue decreased slightly, mostly due to a high comparison basis last year. OMDA was 50 basis points up at the end of December 2019 compared to the same period last year and reached EUR 307.2 million or 33.4% of revenue, thanks mainly to the aforementioned business plan in Issuing Services, Accounts Payments and Digital Banking as well as further efficiency gains from TEAM2, equensWorldline and SIX Payment Services transformation program.

In Mobility & e-Transactional services, revenue reached EUR 343.8 million, increasing by 10.8% organically or EUR 33.6 million compared to last year. This is a very good performance for this division this year. All 3 business division recorded strong organic growth rate, revenue in e-Ticketing expanded, thanks to the development of Tap2Use contracts in various French cities as well as the ramp-up of the e-Ticketing contract signed last year for the Paris region. Latin America also contributed to this growth.

Trusted Digitization benefited from good transaction volumes and project activity, notably on service-related to tobacco tracing for excise collection, addressed with various government agencies. e-Consumer & Mobility grew high single digits, mainly driven by the continuous increase of contact contracts with French customers as well as a good contribution of volume growth in Connected Living and mobility activities.

OMDA reached EUR 53.4 million or 15.5% of revenue, increasing organically by 90 basis points compared to December last year. Key reasons of the increase were the good business trends in all business divisions due to the recently won contract; the productivity improvement with increased scalability of our platform; and the impact of the TEAM2 actions.

Let me now walk you through the key elements of the evolution of our net debt. We started the year with a net debt position at EUR 35 million. This net debt increased by EUR 1,071 million with the acquisition of a minority stake in equensWorldline in the third quarter of 2019. As you know, we financed this part of the acquisition for EUR 600 million convertible bond, of which EUR 82 million is recorded as equity, decreasing our business by this amount. Our net debt was further reduced by the release of the EUR 118 million contingent consideration to our fixed group related to the acquisition of SPS booked in 2018. Indeed, as a consequence of the announcement by SIX Group AG of a product transaction on top of their wallet share, the rise of SIX Group to receive a potential additional payment for the sale of SPS was terminated figuring the release of this financial liability. Last, the free cash flow for the year of EUR 288 million, both our year-end net debt at EUR 641 million.

Let me now finish my presentation with the presentation of our financial objective for 2020, fully in line with our ambition for 2021. The group expects to achieve an organic growth of its revenue above 7% at constant scope and exchange rate. In terms of profitability, the group targets an OMDA margin between 26% and 27%. For cash generation, the group has the ambition to generate a free cash flow comprised between EUR 325 million and EUR 350 million.

Thank you very much. I am now ready, with Gilles and Marc-Henri, to take a few questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have 1 question in the line, which comes from the line from Hannes Leitner from UBS.

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Hannes Leitner, UBS Investment Bank, Research Division - Equity Research Analyst of Software [2]

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Could you please explain why the conservatism in your guidance as you exited 2019 at 7.5% with your guidance at 7 -- only above 7%? It feels a little bit cautious.

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Gilles Grapinet, Worldline S.A. - Chairman & CEO [3]

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Thanks for your question. Eric, do you want to take it?

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Eric Heurtaux, Worldline S.A. - CFO [4]

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Yes, sure. You know that we ended with 6.9%. So we want to continue to accelerate as we have done in the course of 2019 and that precisely what is the most 7% reflects. We have a guidance for a 3-year plan, which is a CAGR between 7% and 8%. So we do believe that above 7% is probably into the bucket. But obviously, the more the better, and we will not slide off 7%. That's the reason why the above is very important in this guidance.

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Hannes Leitner, UBS Investment Bank, Research Division - Equity Research Analyst of Software [5]

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Okay. And then just in regards to the synergies from the SIX Payment Services. How far we are in it? And what are the chances that you identified higher synergies than the transaction?

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Gilles Grapinet, Worldline S.A. - Chairman & CEO [6]

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No, I'd say, indeed, on the synergies and SIX Payment Services, it has been a fantastic year starting such a big integration, applying along methodology. We are clearly exactly as I planned. You can see it's reflected in the 500 bp improvement of the margin of Merchant Services. And you may remember, SPS was 80% Merchant Services. So such an achievement this year is a clear reflection of the success of this plan. And overall, Eric, I mean, it's a bit soon to review the number for the full SPS financial ambition, but we look forward going through this every year, delivering these synergies and above. And for this year, I would say, in the range of an additional 10 bp to the overall performance at minimum is the contribution of the other performance of the synergy plan. It's important, in a synergy plan, to start ahead of it to go faster. And to some extent, I can also mention that we were able to largely achieve it by a strong redeployment of people without massive severance, which is our signature, as you know, and it's very important for the cash of the company and to concentrate the effort not on paying severance costs, but further on investing in the industrial transformation of the platform for that convergence for the long-term and delivery of our plans.

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Eric Heurtaux, Worldline S.A. - CFO [7]

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Yes. And I would like just to add to that, that really personally, it is one of my biggest satisfaction in 2019. This integration engine is working like a charm. The mindset and the efficiency of the steering of the integration of SIX Payment Services is really from your old model and definitely, we are absolutely at par with what we have in our plans to really make this deal one of the best deal ever delivered by Worldline.

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Operator [8]

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Your next question comes from the line from Charlie Brennan from Crédit Suisse.

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [9]

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It's just another question on the guidance, actually, and specifically, the free cash flow. If I do some quick math, it looks like it's about 50% conversion of our NDA into free cash flow. Can you just walk us through the line items of CapEx, interest and tax to get us down to that free cash flow number? And I guess, specifically, I'm wondering what the working capital dynamic looks like?

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Eric Heurtaux, Worldline S.A. - CFO [10]

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Yes, sure. So your math is correct. Basically, we should expect 50% of conversion rate, which is slightly above what we delivered this year. In terms of work full and line by line. I would expect a moderate increase in CapEx, an increase, which may be a bit higher in tax because we got some tax repayments this year, in particular in H1. We may have a little bit more cash impact of tax in 2020. And as far as working capital is concerned, this year, and in particular, H1 has been a negative contribution.

You remember that in Worldline, we used to have a very positive contribution of the change in working capital requirement. It was not exactly the same situation with SIX Payment Services. So overall, the target would be to be to close to 0, slightly negative in the change in working cap there to absorb the growth we expect to deliver during the year. So that's to give you some flavor on what is built into this model.

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [11]

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And can I just clarify, within your 2021 ambition, am I right in thinking you were expecting a flat to slightly positive working capital? It now sounds like you're talking flat to slightly negative. Has there been a change in the working capital cycle? Or have I misinterpreted the 2021 ambition?

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Eric Heurtaux, Worldline S.A. - CFO [12]

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No, I think you are right. We took an assumption, which was more in the continuity of what we delivered in the past on the working capital when we build our 3-year plan. So it was to be probably close to 0, probably with the excellent performance we got on SPS perimeter in terms of growth, which are negative on the working capital. We may be slightly negative. However, this does not change at all the trajectory we set for ourselves in terms of free cash flow generation and the target we set for ourselves in 2021 is still valid.

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Gilles Grapinet, Worldline S.A. - Chairman & CEO [13]

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So we have no more questions, I believe?

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Operator [14]

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No more questions at this time now.

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Gilles Grapinet, Worldline S.A. - Chairman & CEO [15]

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Thank you. So I will -- before leaving you guys, many thanks for attending this con call on our full year 2019. David Pierre-Kahn has a logistic point to share with you regarding the next con call we will have regarding the intended acquisition of Ingenico by Worldline.

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David Pierre-Kahn, Worldline S.A. - Head of Investors Relations [16]

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Yes, good morning to you all. As you are well aware, we are now going to comment our transaction with Ingenico at 8:30. For technical reasons, this will be done on a different conference call number. So I will ask you to disconnect from this call and reconnect using the connection codes that are in the details of the press release that was sent out this morning at 7 A.M. So please we'll take a sharp back of 10 minutes for everybody to disconnect from this call and reconnect to the other one from 8:30. Thank you for your participation, and talk to you in 10 minutes.