Francotyp Postalia Holding AG
XETRA:FPH
Earnings Call Analysis
Summary
Q3-2023
FP Group showcased resilience with its signature FP Sign product driving better customer experience despite losing a major client, affecting DBS revenue. The eBO application for digital court communication has a slow uptake, anticipating more adoption closer to legal deadlines. Nordic franking machine sales can now replace competing Pitney machines. The ERP project is advancing, yielding sales improvements in Sweden. German SaaS attempts are leveraging existing franking machine customers. Q3 results show a slight revenue decrease, flat EBITDA, with a 24% year-on-year improvement when accounting for currency effects, and a future focus on improved earnings per share and cash flow, amid lower revenue growth forecasts at the guidance's lower end.
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Good morning, ladies and gentlemen and welcome to the Francotyp-Postalia Holding AG Conference Call regarding the financial results for the third quarter of 2023.
[Operator Instructions] Let me now turn the floor over to your host, Carsten Lind, CEO of FP Group.
Thank you. Good morning, everybody, and welcome to the conference call on Francotyp numbers after 9 months in 2023. So before digging into the numbers, a few statements on what happened operationally and what is happening operationally in the company. If we start with the Digital Business Solutions, we have launched a major new release for the signature product, FP Sign, which seems to be well received in the market and make this product now, let's say, free of the old technology platform. And with the new release, we have added much more enterprise functionality that simply drives a better user experience from our customers. So that on the output side, in DBS, we have year-on-year, actually, less revenue since we -- which very rarely happens that we have lost one customer. They lost their business and -- with their customers that impacted us. However, so -- and since this area is still the larger portion of the DBS revenues, the weight of this is relatively heavy. So the growth this time is smaller than we anticipated. However, on a 2020 to 2023 still in the 15% to 20% range that we like to be in.
Also, the eBO application, which is the service for digital communication with courts in Germany, as mentioned, was launched in June. And we see there some developments, it's a little bit slow since we envision companies are still some distance away from the, say, deadlines of legal needs to be on this platform, but it is moving forward, and we have the first customers installed on the platform and it's working.
So in the Mailing, Shipping and Office business. Finally, after a long, let's say, tedious work with certain postal operators, we are now able to not just sell but also connect our franking machines across certain countries in the Nordics and that is obviously important because we are there replacing the Pitney machines with FP machines going forward. And so this replacement project that will go on for another couple of years, we can now accelerate and move forward there in the way that we planned to do.
Else, we can say that we have good progress -- continuous progress on the ERP project. As we mentioned last time, we have the Digital Business Solutions and Sweden onboarded. We are working on the next ones. And what happened with Sweden after getting onto the new system and merging the companies there is that we see also there a pickup on the sales side.
So that's very welcome because the ERP project is not only about reducing the cost, which we will do, but also on developing the business. And the last statement on the MSO business is that we have initiated in Germany the first attempts to really leverage the installed base of franking machine customers for some of the SaaS solutions for -- from our digital business side, like FP Sign and others.
So we are eager to see what happens over the next 6 months on that sales process. And overall, as we will see when I go into the financial slides shortly, overall, the business is holding up well, in particular, the franking business in the light of this year having quite a pile of headwinds. Whereas last year, we had quite a number of tailwinds. So -- but still, the business is resilient and holding up in a good way.
So on the numbers. As we can see here a slight decline in revenues and EBITDA, but relatively flat, quite flat as well, also flat on the earnings per share. As I mentioned before, the year-on-year growth is not what we wanted for the Digital Business Solutions. However, it's actually the, let's say, least digital products in that business area that we consider temporarily to disturb us a bit there.
Otherwise, as I said, the business is holding up in a good way. And on the EBITDA, as we also communicated the last time, we have some -- various effects that are holding us still down at this level, but also, for example, compared to last year, some real different effect on the exchange rates and also the fact that we had last year, as mentioned several times, the rate change in Germany, which has quite a high impact on these numbers.
So filtering out and also to be said, in the EUR 22.2 million EBITDA versus EUR 22.4 million last year, we now have released EUR 2 million. There were some questions last time on this accrual and whether we would release it or not, you could say, in line with the changed assumptions and some people that we have no longer on board where we didn't need to use the accrual in line with our auditors, we have released EUR 2 million in terms of the outlook that we see right now, which is, of course, increasing the EBITDA here in Q3.
So going to the next slide and looking at the taking out, let's say, the main effects on the ERP and the exchange rate effects. So looking at the EBITDA with constant currency as we can outline here. On the underlying business, we are improving year-on-year, even in the light of the headwinds and not the tailwinds.
So that is -- with 24% improvement on the EBITDA, we think is a reasonable status at this point in time. So free cash flow and net debt since we are earning a bit less and also on the cash flow, there was last year a one-off tax refund in Netherlands, U.K. and U.S. that kept the cash flow a bit higher, the cash flow is reduced versus last year.
We have not normalized it here because we only provide a normalized EBITDA. However, we are still on the path forward, and we will continue going forward on increasing the cash flows and also reducing the debt as we have shown here.
The debt reduction this time is a little less in percentage that we normally decline it and the cash is less as well since we paid back actually EUR 7.5 million on one of the syndicated loans. But just to, let's say, confirm that going forward, the net debt, we envision to decrease and the cash flows will increase.
So going into the business areas. The Digital Business Solutions, as mentioned, good progress and still fast growth for the Software-as-a-Service area and at least temporarily a bit of more work to do on the document workflow management. The good thing there is that the investment projects that we mentioned earlier in terms of, let's say, modernizing the input-output factory with new hardware and new software to deliver those services, we are kind of getting to the end of that.
So we actually have a better platform. And we also see that the pipeline in this area is actually growing and not shrinking. So we expect that we can get back to a better performance also in that area in the near future so that we can get back to the 2-digit growth on the Digital Business Solutions.
MSO, as mentioned, slightly below, but 1.5% versus last year's -- on the as-reported figures, 1% decline versus last year, which was heavily helped by tailwinds, shows the stability and resilience of the franking business that -- in FP.
For Mail Services, not so many comments. We have spoken many times about the sizable one-offs related to corona in the beginning of 2022. That is, of course, still in the normalization perspective here. But overall, freesort is stable, it's profitable and it's in a much better shape than it was just a few years ago.
The outlook, of course, will follow. It's like the franking machine business, the market is a year-on-year declining market. Default since it more or less follows the development of the letter mail volumes in Germany. However, we still see that freesort also for the coming years will be at the level now, which for this business model, we consider to be a good level.
So the summary, after 9 months, is the same as last time. I would say that the revenues are pointing to the lower end of the full year guidance. So we still -- so we see us being in the guidance, we confirm the guidance. We have the stable franking machine business, the MSO and Mail Service is quite stable. We continue to grow the SaaS solutions.
On the EBITDA, we are in line with the guidance, the margin of 12.3%, and again, we have quite some headwinds this year versus last year's tailwinds and this year -- last year, largely, it was the less -- or it was more euros for dollars that was the tailwind.
This year, the headwind is not only related to dollars but also to British pound, to Swedish krona and to Norwegian kroner that all lost in terms of euro. And on a normalized basis, revenues growing with 7.8%, EBITDA growing 24%. So guidance. Lower end of the revenue guidance, and we meet the EBITDA guidance likely somewhere in the middle.
Then what's next? So in terms of having not yet completed the ERP project and the associated savings on [ OOEs ] but also restructurings that will happen after that project is completed. And quite some other projects in the FUTURE@FP program. We are very confident that the years ahead we can improve, also sizably improve the earnings per share, the free cash flow and still -- and reduce the debt while still having growth in the real EBIT-carrying applications in the Digital Business Solutions and keep stable the installed base in the franking machine area, complete the replacement project in the Nordics and hence, overall, for MSO and freesort have a stable outlook.
So these were, in 15 minutes, the comments and the words in terms of where we stand after 9 months. And I'm now happy to take questions, should there be any.
[Operator Instructions] So the first question comes from Felix Ellmann from Warburg.
Yes. Unfortunately, I have to pose a question on these bottom line things. With regards to the depreciation and tax, the depreciation came in quite lower than I expected, while the tax rate was on the 9 months, very high. I think this is something with the bookings. So it's nothing special. My question was, what would be a good assumption for the whole year taxation and depreciation and amortization? Looking at the first 3 quarters, I could imagine that you would end up with a depreciation for the whole year somewhat around EUR 18 million, EUR 18.5 million in depreciation and amortization, while the tax rate should be normalized on the whole year's business and has shown somewhat a special effect on Q3 and because the tax rate is over 50% in the 9 months and the Q3. I think this is not normal. So maybe you could evaluate on these 2 topics a bit?
So thank you for the question, Mr. Ellmann. So basically, we -- let's say, your assumption on the EUR 18.5 million is a reasonable one on depreciation. On the -- we did right in the report relating to the Q3, at least we -- that was the intention to give a thorough explanation of this strange and artificially high tax percentage. I would, at this point in time, refer you to this description and have a look at that. If that is not satisfactory, please send me an e-mail, then I'm happy to set up a call where we walk through it. But you're absolutely right that the tax percentage looks a bit strange. There are a number of reasons and special effects in terms of -- in the short term, having this strange 50% tax.
Okay. But to make it short, will this normalize for the end of the year or will we be seeing a high tax rate for the whole year '23?
We expect that this is what we are looking at for '23. Going forward, it will come to a normal level of 35%-36%-or-something.
The next question comes from Sy Stanley Schlueter from CAI Analyse- und Beratung.
I have a question more related to the general outlook into the Q3 numbers. Have you -- any plans materialized with regard to paying a dividend or replacing or renewing a share buyback program?
So the first share buyback program is coming to an end. There's been a little bit -- it is done. We will shortly evaluate that program. We are looking into eventually launching a new share buyback program. And at this time, you can say we see space in our numbers going forward that we can do definitely a new share buyback program. We could potentially also pay out a dividend. At this point in time, we have not decided it yet. We will have a deeper look at the -- and evaluate, first, the share buyback program with, let's say, with a -- and it is likely that we could launch a new share buyback program.
Mr. Peter Rothenaicher from Baader Bank AG.
Yes. I would be interested in the market development franking machines. So in the past, it was always so that you gained market share. Has this continued? Can you give us here some more details? And I also would be interested in a regional split, how you did perform in the third quarter and in 2023 so far regarding Germany, Europe, U.S., et cetera?
Okay. Right. Thank you for the question. We are not really looking at the market shares, but looking at how the actual installed base of franking machines is developing because market shares in year-on-year declining markets somehow is not so interesting.
So the -- where we stand and going forward and defining the installed base as franking machines connected to the FP infrastructure, we envision that we can keep this installed base flat for the years going forward. Obviously, let's say, on regional differences, we have some, let's say, in the U.S., we believe we can add slightly to the installed base. Unfortunately, the, let's say, improvements that we are doing there this year and let -- who knows what the exchange rate will be next year, but it looks like it's getting, let's say, not in our favor. So the improvements that we are making there are eaten up by less euro for dollars, which, of course, is a bit irritating. We cannot control that. In Europe, we have some countries that are, let's say, more advanced in terms of digitalization in the government-to-business and in the business-to-business area, where the declines are still quite steep. So looking at the Scandinavian countries, Benelux, et cetera, is quite steep. Whereas, in the DACH region, it's quite stable. And this, let's say, adding the whole thing together is, let's say, we still see a quite stable outlook in terms of the number of franking machines. An important perspective here, of course, is as well to look at the amount of imprints or, let's say, the level of -- the flow of paper and documents going through the franking machines that again, in some countries, this is reducing, obviously, because every time we see a new application launched from the public sector or in the business-to-business environment, it will take some volumes of the franking machines and eventually, the volumes going through the franking machines can become so low that the next time around where you want to switch the customer onto the franking machine, the answer is, "Well, we will not take a new machine because of the volumes are so low." And that is also one of the reasons that we now again and -- or not again, but that we try to leverage the installed base of franking machine customers and start onboarding a number of those customers so that eventually, when they will not need the franking machine if they could then continue on FP Sign or continue on our TRAX software or use a Parcel Shipping, et cetera, then we can keep the customer and still have good margins on the Software-as-a-Service. So that is how we envision it. And I think this quarter here, with a 1.5% decline where we compare to last year with quite heavy tailwinds. And this year, we have headwinds shows that this -- that we don't see that this business is falling off a cliff in a few months or in a few years.
Okay. And regarding Digital Business Solutions, you talked that you were negatively impacted by one customer falling off in business volume. Do you think you can make up this relatively fast or what is your view then on fourth quarter and particularly 2024?
So if we look at across the areas within what makes up the Digital Business Solution, this, let's say, more this hybrid or more traditional document workflow management part, which has the output or the printing and the handling of incoming documents, both digital and paper based, we did, let's say, envision that we could have, going forward, small growth in that area. And in the light of also having, let's say, renewed and having now a better, not just price-wise, but also a better offering in terms of a more IT-intensive platform there, we absolutely are working forward to bring in new customers and get back to small growth in this area. There's, of course, no guarantee that it will succeed. But the pipeline is growing. We are out in the market making some noise and being on conferences and events relating to output and input management. On the products relating to Software-as-a-Service for the German public sector and FP Sign, TRAX, et cetera, we envision that we can grow for the years to come with good growth rates. So overall, we think that 2024 could be seen with better growth rates than we have right now, obviously, in -- across the whole Digital Business Solutions. So that is -- nothing has changed there. It's, of course, an irritation that we have effects like that in there. It happens very rarely because normally, when customers are onboarding any of our Software-as-a-Service or the output side, they stay for many years. The attrition of the installed base of customers in DBS is really low.
There seem to be no further questions. [Operator Instructions] So as there are no further questions, I'm handing back over to the host.
All right. Thank you very much, everybody, for spending time with us this morning. Yes, obviously, we are driving the business forward. And well, as always, we are looking forward to the next time. Maybe some of us meet at the ICAIF next week. And yes, thank you, everybody, and speak soon.