H1 2018 results
2018 outlook adjusted from the anticipated phasing out from Iran
In 2018 Ingenico Group expects an EBITDA of at least €545m vs. a range of €545 million and €570 million previously. Following the US withdrawal from the JCPOA5 announced on 8th May 2018, the Group has anticipated the phasing out of its distribution partnership in Iran, in line with the US law. The Iran contribution, now excluded from our 2018 adjusted guidance, represents €16 million. However, the EBITDA related to these sales to Iran is still possible to execute within the timeframe.
The guidance factors in a negative impact from currencies of c. €25-30 million.
Given the high comparison basis in the first half and the projects pipeline, the phasing of the year has resulted in a soft first half and we expect a stronger second half. The adjusted FCF2 to EBITDA conversion ratio is expected to be above 45%.
Over the full year, our assumptions are based on a soft organic decline for the Banks & Acquirers business unit and a double-digit organic growth in Retail. The second half of the year will benefit from a higher growth, driven by an acceleration of growth in the Retail business unit and an improvement in the Banks & Acquirers business unit.
Key financial highlights of the first half of 2018
In the first half of 2018, revenue totalled €1,229 million, up 1% on a reported basis, including a negative foreign exchange impact of €71 million. On a comparable basis, revenue was 3% lower than the first half of 2017. Restated from the impact coming from the PCI V1 to V3 migration in Europe and the demonetization process in India, revenue would have grown 3% on a comparable basis.
EBITDA reached €193 million in the first half of 2018, i.e. a 15.7% EBITDA margin on gross revenues, down 3.6 points compared to last year on a pro forma basis. It has been impacted by the business mix. The second half of the year will be more favourable in terms of business mix which gives us confidence in the EBITDA improvement to reach our adjusted full-year guidance.
During the period, the Retail Business Unit reported a revenue of €630 million, an increase of 22% on reported figures, including a negative foreign exchange impact of €34 million. On a comparable basis, revenue was up 6%, driven by the strong SMB dynamic and the Global Online performance. In Enterprise, growth has been impacted by the tough comparison basis of the first semester 2017 related to the demonetization process in India and a contract that sifted to Q3.
EBITDA reached €77 million, representing an EBITDA margin of 12.2%, compared to €63 million last year.
The Banks and Acquirers Business Unit posted a revenue of €599 million, a 15% decline on reported figures including a negative foreign exchange impact of €37 million. On a comparable basis revenue declined by 11%, mainly impacted by the very tough comparison basis in India (demonetization process) and in Europe (PCI V1 to V3 migration), partially offset by the strong recovery in Latin America, especially in Brazil. Restated from these tough comparison basis, revenue would have been stable on a comparable basis.
EBITDA reached €116 million, representing an EBITDA margin of 19.4%, compared to €182 million last year.
Key strategic highlight of the first half of 2018:
Signing of BS PAYONE combination with Ingenico Retail assets in DACH
Ingenico Group today announced it signed a deal with DSV Group (Deutscher Sparkassenverlag), a subsidiary of the Sparkassen-Finanzgruppe, regarding the combination of BS PAYONE with Ingenico Retail assets in DACH (Germany, Austria, Switzerland). This non-cash business combination, at a time when transaction multiples keep on rising, will be 52% owned and controlled by Ingenico Group.
Within the DACH region, Germany, which is the main exposure of BS PAYONE, is the third largest market in Europe and the most dynamic country in the region in terms of electronic payment. With predominant cash transactions representing more than 70% of the overall transactions, cashless volumes are accelerating and should grow by 7% over the next five years. It offers strong growth perspectives for those players who are able to provide comprehensive and end-to-end electronic payment acceptance solutions to merchants.
Headquartered in Frankfurt, BS PAYONE is a leading full-service payment provider offering instore and online payment solutions and employing around 700 people. Serving more than 250,000 merchants in various industries, from small and medium-sized businesses to large international accounts, BS PAYONE is the second largest international card acquirer in Germany and a major Network Service Provider (NSP), with a volume of over €50 billion processed, of which €27 billion is from international card acquiring, and more than 135,000 point-of-acceptance devices. BS PAYONE benefits from close partnerships with the savings banks (“Sparkassen”) in Germany. In 2017 BS PAYONE generated €324 million in gross revenues6 and €31m EBITDA6.
The joint venture would have a unique footprint in DACH with a combined volume processed of €125 billion and close to 335,000 point-of-acceptance devices. The combined entity would have generated a gross revenue6 of over €500 million and an EBITDA6 of c.€75 million in 2017. Over the period 2017-2021, the combined entity is expected to grow at a low double digit CAGR in term of revenues and a high double digit CAGR in term of EBITDA. The ambition of the combined entity is to become the largest acquirer in DACH and to further consolidate its Network Service Provider (NSP) leadership. The combination between the two assets is expected to generate significant synergies of €30 million, largely realized by 2022.
The partnership will represent a significant milestone in the execution of Ingenico Group’s strategy:
- Create the clear market leader in the attractive German market with the broadest offering instore and online covering the specific needs of all types of merchants;
- Build an operational long-term partnership with the Sparkassen, including an 8-year lock-up;
- Develop the SMB offering by combining Ingenico and BS PAYONE portfolios while rolling-out Bambora’s customer-centric approach in the future JV;
- Offer end-to-end payment acceptance solutions to large accounts;
- Leverage Ingenico’s global infrastructure to capture growth potential in the region and beyond.
The closing is expected to occur during the first quarter of 2019, subject to approval from the relevant regulatory and antitrust authorities.
Performance in the second quarter of 2018
In the second quarter of 2018, Ingenico Group reported a revenue of €648 million, up 3% on a reported basis, including a negative foreign exchange impact of €31 million. On a comparable basis, revenue declined by 2% compared to the second quarter of 2017. Adjusted from the tough comparison basis coming from the PCI V1 to V3 migration in Europe and the demonetization process in India, revenue would have grown 3% on a comparable basis.
The Retail Business Unit has continued to grow in the second quarter, following a similar trend to the first quarter despite some non-recurring low growth profile in Global Online. Over the second quarter, revenue reached €328 million, up 21% on a reported basis and impacted by a negative foreign exchange impact of €16 million. On a comparable basis, revenue increased by 5%. Compared with Q2’17, the various activities performed as follows on a like-for-like basis:
- SMB (up 12%): The quarterly performance has been strong, including Bambora growing fully in line with the expectations stated at the time of the acquisition. Over the second quarter, the teams have been able to sign more than 4,000 new merchants per month, to successfully deploy the pilot of the merchant cash advance offering and to increase the acquiring volumes by more than 20% compared to the second quarter of 2017. The Switzerland activities continue to grow and significant technical milestones have been reached in Germany regarding its Bambora model roll out. The pilot of the new offer is on track and its commercial launch is planned for the third quarter. Online SMB activities were still very dynamic, driven by the full-services offer which grew by more than 50% this quarter.
- Global Online (up 5%): As already stated, the performance of the quarter came in line with our expectations. The churn rate continues to improve, with this being the second consecutive quarter it has reached an historical low level and the lowest since 2015. These improvements enabled us to gain new merchants such as Pearson, ShineZone or Liverpool Football Club with whom the Fraugster solution has been implemented. Several awards have been won during the quarter, such as the best international CNP Program awarded by the merchants for the third consecutive year, as well as the Best Use of Social networks or Gamification thanks to its partnership with LuckyCycle. In the meantime, teams were focused on optimizing the cost base enabling us to be more agile and flexible.
- Enterprise (down 1%): The overall dynamic has been strongly impacted by the North American following a tough comparison basis this quarter with a client that made a meaningful order last year. On top of that a significant contract has been shifted to the third quarter, impacting the region’s dynamic. Nevertheless, we remain confident in the dynamic ramp up in the second part of the year driven by the beginning of the EMV refreshment cycle. Europe is still strong, sustained by the instore gateway processing business growing at 15% in the second quarter. Significant projects have been managed in order to support big retailers abroad and iconic new clients have been won over the quarter. In the meantime, the Enterprise strategy is still focused on expanding its geographical footprint both in Europe and outside Europe, with ongoing new local certifications. It will enable the Group to reach a wider geographical area where it could leverage the positioning of its existing clients as well as enlarging its addressable market.
The Banks & Acquirers Business Unit has shown, in the second quarter, the beginning of the expected recovery, despite the very tough comparison basis. Revenue reached €319 million, down 10% on a reported basis and negatively impacted by €15 million of foreign exchange. On a comparable basis revenue declined by 8%. Adjusted from the impact coming from the PCI V1 to V3 migration in Europe and the demonetization process in India, revenue would have been up 1% on a comparable basis. Compared with Q2’17, the various regions performed as follows on a like-for-like basis:
- Europe, Middle-East & Africa (down 11%): The performance was strongly impacted by the tough comparison basis of the PCI V1 to V3 migration that took place during the first half of last year and a softer than expected dynamic in Middle East. Despite those specific situations, the remaining dynamic was in line with our expectations in most of the countries in Western and Eastern Europe, except for Germany and Switzerland, that came in softer than expected. Those two countries have been impacted by the ongoing consolidation that creates turmoil in the market landscape and its evolution. We are continuing to closely monitor developments and expect a return to stabilization over the near to medium term. As already stated, the launch of Axium has raised lot of interest from clients and the first orders have already been signed with Lottomatica in Italy, which should fuel the growth of the second half of the year.
- Asia-Pacific (down 13%): The tough comparison basis in India is still impacting the region's overall dynamic despite good momentum in the market. India continues to return to normal after the strong demonetization process that positively impacted the region last year. The South-East Asia market has experienced a slowdown in demand in Thailand and Indonesia following an important cycle of orders and shipments. China performed in line with our expectations, i.e. no major evolution in terms of activity, still benefiting from the APOS (c. 380k unit shipped) but with a comparison basis that limits the growth potential. As expected, Australia is now back on track after the phasing of local tenders that negatively impacted the first quarter, and Japan is still ramping up in light of the EMV equipment phase.
- Latin America (up 21%): The recovery expected for a few quarters in Brazil is now live as the Group has benefited from the impact of the first local tender offers, using Telium Tetra and in some cases APOS solutions designed and manufactured by Landi. Therefore, Brazil is accelerating significantly with an important pipeline of projects that give confidence for the remaining part of the year. Other countries, such as Argentina, remain very dynamic whereas Mexico is slowing down temporarily due to to recent presidential elections.
- North America (down 9%): The performance came in as expected overall, with Canada performing strongly thanks to last time buys tied to the conversion to Telium Tetra deployment with one of the major local acquirers. In the United States, the Independent Sales Vendors (ISV) certifications are still ongoing and the channel continues to see traction especially in the Healthcare, Unattended and Hospitality verticals. The second half of the year should benefit from these new certifications as well as the acceleration of the mobility range of products, especially the newly launched M70 that is currently in the pilot phase.
During the first half of 2018, adjusted gross profit reached €489 million, or 39.7% of revenue, representing a 250 basis points drop compared to the first half of 2017 pro forma adjusted gross profit. This fall is mainly attributable to the business mix evolution this semester that has weighed on the margin.
Operating expenses contained over the semester
In the first half of 2018, adjusted operating costs were €295 million, representing 24% of revenue compared to 22.3% in the first half of 2017. Compared to the same period last year on a pro forma basis, the OPEX have decreased by €12 million during the first semester.
EBITDA margin and profit from operating activities
EBITDA was €193 million in the first half of 2018, equal to 15.7% and has been negatively impacted by €19 million of foreign exchange. The margin has been impacted this semester by an incompressible part of OPEX in a declining Banks & Acquirers business unit. The latter was facing two significant comparison bases that led to a strong fall this first half and so a compression of the EBITDA margin. Nevertheless, thanks to the growth acceleration we expect in both our business unit and to the operating leverage, we remain confident with our adjusted full year EBITDA objective.
After accounting for Purchase Price Allocation and other operating income and expenses, profit from operations totalled €94 million. The Group’s operating margin was equal to 7.7% of revenue.
Profit attributable to Group shareholders
Financial results reached €-19 million, against €-10 million last year on the same period.
Income tax expense decreased to €20 million compared to €51 million in the first half of 2017. The reduction of the tax expenses is the consequence of the decline in income before taxes as well as a weakening of the effective tax rate.
The net profit attributable to Ingenico’s shareholders in the first half of 2018 reached €54 million.
Free cash flow and financial position
The adjusted free cash flow7 reached €40 million, i.e. an EBITDA conversion rate of 20.7% compared to €76 million last year. Following a dynamic year in terms of acquisition, the first semester 2018 has been impacted by a non-recurring expenses increase. The Group’s operations, post other income and expenses, generated a free cash flow of €23 million, i.e. an FCF/EBITDA conversion ratio of 11.7%. Investments increased to €53 million, related to the acquisition of Bambora.
The Group net debt increased to €1,702 million, against €1,471 million at the beginning of the year. The increase of the net debt level is mainly related to the Fosun stake purchase, share buyback and the dividend payment. The cash dividend paid in respect of 2017 was €48 million, whereas 50.3% of the total dividend amount was paid in stock (781,413 shares), reflecting the shareholder confidence. The ratio of net debt to equity is 101% and the ratio of net debt to EBITDA is up to 3.6x from 2.8x at the end of 2017.
- On a like-for-like basis at constant exchange rates
- EBITDA is not an accounting term; it is a financial metric defined here as profit from ordinary activities before depreciation, amortization and provisions, and before share-based compensations
- Free Cash flow adjusted from non-recurring items (acquisition and restructuring costs)
- On an LTM basis
- Joint comprehensive plan of action
- Estimated IFRS figures derived from German GAAP subject to adjustment
- Free Cash flow adjusted from non-recurring items (acquisition and restructuring costs)