Loomis AB (publ)

Good morning, everyone, and welcome to the third quarter presentation for Loomis. My name is Aritz Larrea, and I'm the CEO of Loomis. With me here today, I have our CFO, Johan Wilsi, who joined Loomis in October, and Jenny Bostrom, our Head of Sustainability and Investor Relations. I want to start by welcoming Johan to Loomis. It is great to have you on board. Thanks, Aritz. Hi, everyone. I will now present the overview of the quarter and then open up for questions. Let's start the presentation by turning to slide three. We had a solid performance during the third quarter. The business in Europe and Latin was supported by continued growth, and in the United States, we saw growth across all business lines, and we believe our high-quality services will continue to gain market share. Most business lines had revenue growth in the quarter, but we did see the volumes in international business come down. When it comes to Loomis Pay, we continue to see that our efforts are paying off in terms of both increased revenues and transaction volumes, where we saw strong growth within all markets. Our SafePoint business has continued to perform well in the quarter. Our commitment to growing and developing our offer of automated solutions is an important part of our strategy. As we announced in July, we are expanding further into this field with our strategic acquisition of Tima. Their dedicated focus on R&D and technological know-how is a great strength of the company, and our complementary strengths will allow us to develop ad hoc solutions that add value to our customers. Chima's global sales network will also provide us with additional growth opportunities and access to new markets. We closed the acquisition at the beginning of October, and the business will be consolidated into the Euroblattum SafePoint business line in the fourth quarter. The continuing geopolitical and macroeconomic concerns have a dual impact on markets we're in. As we've stated before, while increased inflation may change consumption patterns within the retail business, higher interest rates provide an incentive for financial institutions to move cash quicker. We're also seeing that the higher interest rate environment impacts the demand for storage and transportation of cash and valuables, which has a negative effect on the international business line. Let's move on to the next page where we have the highlights for the quarter. We had a strong performance in the quarter and achieved a revenue above $7.4 billion, which is the highest revenue ever in a single quarter. The revenue was positively affected by volume growth, and we are steadily increasing the recurring revenues from both our automated solutions as well as the ATM business. The currency movements in the quarter were also favorable. We saw strong organic growth in the quarter, with an increase in all three segments, despite a strong comparable quarter. We also recorded double-digit growth for our automated solutions overall. Regarding the operating margin, it was at 11%. Our margins benefited from increased volumes and efficiency measures in a climate of severe cost inflation. Two non-recurring costs in Europe, however, offset the margin. I will go into more details on these items later in the presentation. We had a strong operating cash flow of about 700 million in the quarter with a cash conversion of 90%. More working capital is tied up in operations given our continued strong growth. But in terms of base sales outstanding, our accounts receivable remain at a stable level. Let's turn to the next page where you can see how the revenue and the margin have developed over time. We have had a steady increase in our revenue since the beginning of 2021. Including the currency impact, revenues increased nearly 10% in the quarter compared to the prior year. For the quarter, we achieved an operating margin of 11%. If we adjusted for the two non-recurring items in euro, the margin would have been at 12%. Let's have a look at our segments. We turn to the next page and start with the Europe and Latin. The positive trend in revenue growth in Europe and Latin America continued, where we had another strong quarter. We achieved an organic growth of more than 6% and reached record high revenues of close to 3.6 billion. The operating margin of 10.8% was positively affected by the organic growth and increased efficiencies, However, this was offset by two non-recurring items and the volume decline in the international business. The quarter included a cost of $61 million related to the theft of valuables within the international operations. Additionally, a cost of $17 million was recorded within the FX business line due to issues with the system implementation. We are confident that these incidents are not structural in nature and thus non-recurring. Turning on to the next page and focusing on the trend of both revenue and margin, we see that the total top-line growth was above 10%. Since the beginning of 2021, we have seen a positive recovery, expanding quarter by quarter in our main markets, and we are now reaching stronger comparison periods. The operating margin is below Q3 last year, impacted by the two incidents described earlier. Without these costs, the operating margin would have reached 13%. Let's turn to the next stage, over to the U.S. The strong momentum continued in the U.S. business. Revenue was at a record high of $3.8 billion, with continued increase in recurring revenue. Our revenue related to automated solutions and ATMs represent 44% of the U.S. revenue. Organic growth was at 6% in the quarter, with our automated solutions business with SafePoint achieving double-digit growth for yet another quarter in a row. We reported a strong operating margin of 14.2%, and the operating income of $547 million is a new record for us. Moving on to the next stage and focusing on the trend of both revenue and margin, we see the exceptional U.S. business revenue trend during the last two years. And while we have benefited from favorable currency rates during this period, I want to stress that our performance in local currency has also been very strong. Regarding the operating margin, thanks to structured work on operational efficiencies, we improved the prior year's number by 0.5 percentage points. We're also seeing indications that the labor market in the U.S. is easing, which would stabilize the situation that the U.S. operations have had over recent quarters with higher costs for overtime, recruitment, and training. Let's turn to the next page and talk about Loomis Pay. Also for Loomis Pay, we had a strong revenue growth in all markets, both compared to the previous year and to the previous quarter, and revenues reached 15 million. We keep seeing transaction volumes increasing as we move ahead. For the quarter, the increase was 94% compared to the same quarter last year, and we achieved about 1.3 billion in transaction volumes. Let's turn to the next slide where I will share a couple of highlights on our progress on our sustainability initiatives. We can see that our sustainability-related projects are moving forward. An initiative to install solar panels, for instance, has started in the U.S. Eventually, solar panels should be able to meet around 20 percent of the energy needs of a U.S. branch. I can also share that in the third quarter, approximately 30 percent of our energy consumption came from renewable energy sources. I'm very proud of the actions we're taking within the organization and the progress that we're making. Let's turn to the income statement slide, where I will start by highlighting the strong growth we have achieved both for the isolated quarter and for the rolling 12 months, where our real growth is 9%. Regarding the items affecting comparability, which are related to the restructuring plan in Europe and Latin America, we have experienced a slight delay in the execution of the restructuring. Now we have the right team in place to implement the plan, and the majority of the remaining actions will be executed in Q1 next year. Also, as already touched upon, the two incidents within Europe had a negative impact on the margin of 78 million. I would also like to highlight that the increase in net financial items is largely a result of the increased interest rates. As you know, Most of our financing is with variable rates, and how the interest rates will develop going forward is hard for us to speculate on. As announced at the beginning of October, we took a new term loan in connection with the closing of FEMA, and therefore, you can expect the interest expenses to be higher in the next quarter. Moving on to the next slide, to highlight our performance in relation to our history, As you can see, on a rolling 12-month basis, we have achieved record revenues. While our rolling 12-month margin is flat on a reported basis, if we adjust for the non-recurring items, we would have been at 11.1%. We are confident in our business and that we will be able to reach our margin target by the end of the strategic period in 2024. Let's now move to slide 14 to summarize the quarter. We achieved record revenues with strong organic growth for all of our segments for both the quarter and rolling 12 months. Thanks to structured work on improving our operational efficiency, our margin increased in the US. We expect that the situation we have been experiencing with higher costs related to recruitment, overtime, and training should be stabilizing going forward. We had a more challenging quarter for Europe and Latin America due to the international business. If we disregard the non-recurring items we described earlier, our margin in Europe and Latin would have reached 13%, which is a strong margin for the segment. In terms of Loomis Pay, both transaction volumes and revenues ramped up this quarter, and I'm positive that our efforts and investments in Loomis Pay will continue to generate results. Growing our automated solutions business is an important part of our strategy. Notably, we had double-digit growth for the group within our automated solutions for the quarter. With the acquisition of Chima, which we closed at the beginning of the month, we are entering an exciting new period of innovation and growth within this business. We have a strong balance sheet with the capacity to continue to make strategic and value-creating acquisitions. Our capital allocation priorities remain, where we aim to use our capital in the best way to generate returns and create value for our shareholders. The Board of Directors has made the decision to continue to pause share repurchases in the next quarter to prioritize an active M&A agenda. Lastly, we're making progress within our climate-related sustainability initiatives. As we get more and more electric vehicles on the road and further work on optimizing our routes, we are decreasing our emissions from transportation despite growing our business volumes. With additional solar panel installation projects and a higher share of renewable energy, I am confident that we will achieve our absolute CO2 emission reduction targets while growing the business. With that, I'm done with my summary for the third quarter, so let's turn to Q&A. Operator, we are now open to questions, please.

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by 2. If you are using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press star followed by 1 at this time. One moment for the question please. The first question is from the line of Suhani Varanasi from Goldman Sachs. Please go ahead.

Hi. Thank you for taking my question. I think the question I have is mainly on Europe and the margins over there. I see that adjusting for the one-off items, it's approaching 13% EBIT margin, but that's still down year over year. How should we think about the normalized margins here, medium term? And perhaps, are there any concerns going into Q4 that we should be aware of so that we can model it correctly? Thank you.