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Edited Transcript of NEO.PA earnings conference call or presentation 31-Mar-20 6:30am GMT

Paris Jun 9, 2020 (Thomson StreetEvents) — Edited Transcript of Quadient SA earnings conference call or presentation Tuesday, March 31, 2020 at 6:30:00am GMT

Societe Generale Cross Asset Research – Head of Mid and Small caps Europe Research

Hello, and welcome to the Quadient Full Year 2019 Results. My name is Val, and I will be your coordinator for today’s event. Please note this conference is being recorded. (Operator Instructions)

I will now hand you over to your host, Geoffrey Godet, CEO of Quadient, to begin today’s conference. Thank you.

Thank you. So on Slide 1. Good morning, everybody. Thank you for all being connected this morning for our full year results conference call. These are the results for the 2019 fiscal year ended on January 31, 2020. So this morning, I will present with Christelle Villadary, our Quadient new CFO.

Slide 3 on the agenda. So I understand that in this current environment, obviously, you are very interested to hear from us about how we are dealing with this unprecedented situation. I will keep this update for the end of the presentation. We will first go through our overview of our business model and portfolio solution, then we’ll go through our 2019 achievements starting with an update on the execution, obviously, of our Back to Growth strategy. And then I will go through both our operating and our financial performance with Christelle. And then finally, I will give you, with Christelle, some indication about how we’re adapting our business to the economic situation today and what kind of impact we can anticipate on our activity, even though this is still a very difficult time to have a precise assessment at this stage.

Slide 5. I wanted to remind you that until last September, Quadient was still named Neopost. So we changed our name as part of our new strategy, as you know. And this new brand with a new, modern identity is giving us obviously a new impetus. This is a unique brand, a brand that is coming to all our solutions, not just the business that is related to mail. We wanted a brand that represents all our businesses and all our customers. This is fully reflected — I’m sorry, this is fully reflecting today the fact that we’re operating as one unified and well-integrated firm. And whereas we use — sorry, there’s is some background noise. So whereas we used to operate as a holding company with a series of independently managed businesses, now we’re one company with a portfolio of solution.

Our ambition is to help companies and organization to create long-lasting relations with their own customers. Behind every interaction, whether sending an agreement by mail or confirming a booking through a text message or whether receiving a parcel, operating an invoice, there is always something important that matters for the customer involved. And this is why our long-term business purpose is to simplify the connection between people and what matters most to them. And we believe that this is obviously very relevant to a long term of our business, but also, in particular, also becoming very relevant in this time of crisis.

Slide 6. Our solutions obviously are bound to be simple and efficient. They help companies fundamentally with the digitalization of the physical communication and their business process. They help solve the issue of the last-mile delivery in the context of the booming e-commerce and the stress that it creates on all the players of the supply chain. And they help with the management of customer experience, which is a critical battlefield for any organization in particular today where, as a company, you want to differentiate yourself from your competition and have your voice heard. So adding to these macro trends are the increasingly complex regulatory environment that we operate into and issues around compliance obviously, but also the shift in demographic and that translates into new ways to communicate across those new channels. And you understand why our customers rely therefore on our solution today to address their challenge and those changes.

At the heart of who we are and what we propose today, our value proposition, Customer Experience Management allows relevant and personal interaction and providing an omnichannel communication. The Business Process Automation solution helps dealing with account receivable and account payable and document delivery both physically and electronically through our hybrid mailer solution. And our Mail-Related Solutions enables efficient and compliant, obviously, physical communication. And finally, our Parcel Locker Solution provide automated and smart secure lockers for parcel delivery and pickup and, I would add, in a contactless environment.

Slide 7. So we have a — on the slide, a detailed presentation of each 1 of our 4 solutions. What you can see is that we have a mix of pure software solutions on one hand and hardware solution on the other hand, okay? And the latter being, obviously, intelligent hardware and whether you have a connected franking machine or an automated parcel locker, which obviously for the most value lies in the software components. And that enables solution to be both operational and fully reliable. So I will not go through the description of each one of these for solution because most of you already are familiar with them.

Let me just take the opportunity to remind you that we have, on the one hand, a strong legacy business. I’m talking about our Mail-Related Solution which still represents more than 2/3 of our revenue, which is structurally declining. And we’ve been pretty good at mitigating that decline and at performing at minus 3% in 2019, the pace of decline of our competition. And on the other hand, we have 3 other solutions which are our 3 growth drivers. And each one are growing strongly and at double digit. If we look at it, we have our Customer Experience Management at EUR 140 million growing at 12.5% organic growth; Business Process Automation, EUR 65 million at 18.4%; and then the Parcel Locker Solutions, EUR 65 million at 30.7% organic growth.

So the last comment I want to make here is that we have grown in our new solution and we’ve been able to maintain a high level of recurring revenue, and we’ll talk more about it today, which represents 68% of our total sales today. The hardware and license sales of 2019 will turn into new recurring revenue for the foreseeable future. And we’ve been really good at maintaining and nurturing our existing customer base, growing in ’19 our existing revenue originating from those recurring streams.

Slide 8. Without going into the full detail obviously of the market dynamics of each one of our solutions, what I want to emphasize here is that our ambition is to be a market leader, #1, #2, #3 or #4 in each of those markets, right, in each of the 4 markets that we serve. We have picked markets that are at least EUR 1 billion in size or quickly becoming it with — for the other 3, a strong growth for each one of them. So ambition of being a key player in those markets with the market share, that means at least 10% to 15%. So at least EUR 100 million in sales for each of those solutions.

We are already far above that level in the Mail-Related Solution, which is the largest market one, right, where we have a strong #2 worldwide position. We are also above this level already in Customer Experience Management. We are also #2 worldwide. We’re not fully there yet with Business Process Automation in term of size, right, and Parcel Locker Solutions. Those are currently below EUR 100 million. However, we are very confident we can reach this number within a reasonable future. And in Parcel Locker Solution, we already have the third install base worldwide.

We go Page 9. That’s Slide 9. Just wanted to take a little time to discuss about our business model. Our portfolio of solution is made of both hardware, as I mentioned earlier, and software activities. And they have a lot of commonalities in term of business model. For each one of these businesses, we operate a strong installed base. And this is the case obviously for mail-related equipment which are either rented or leased with some maintenance and services embedded in the contract. And this is the case for the parcel locker, which are either sold in the U.S. or rented in our Japan and France market. But even when they’re sold, we keep some recurring activities, such as maintenance activities, with them. And as far as our software businesses are concerned, we either install solution on-premise and we get some license sales obviously but we also have some maintenance and services, and we have a pretty strong recurring of maintenance every year coming out of the software model.

And then we also market our software as a SaaS model which provide us with some subscription fee as well as revenue, obviously, based on consumptions on top of the other services that we have from those platform. So as you can see here, whether they’re hardware or software, the installed base model, we have a pretty high proportion of recurring revenue. You see it at the bottom, clearly above or around 70% for the Mail-Related Solution. Depending on the business model for the Parcel Locker, either 90% or above 90% in Japan and 30% in the U.S. And above 70% for Business Process Automation and around 70% for Customer Experience.

So the main difference between our different solutions is that they don’t apply to all the same customers, as you could see, even if we have the ability to cross-sell a number of the solution to each of those category of clients. And that’s relevant obviously to the synergies that we have developed as part of having that portfolio of solution.

If we go Page 10 and talking a bit about our operating model. As I mentioned to you, we are now operating as an integrated company, okay? That is enabling us to further benefit from the synergies across our solutions and better leverage our sales organization and optimize our shared services and our back office, HR, IT, finance, compliance, legal as well as we are able to mutualize our R&D and marketing efforts. And this is obviously supported by far more [coherent] of the management of our offers, our solution, from one region to the other.

If we go on a bit just a few words on each one of them, we leverage and we pick each of those resolutions because they were better fitting together, but they are not obviously leveraging the same synergies at the same intensity across the board. If we talk about the supply chain and the logistic operation and infrastructure we have, this is mostly synergies that we leverage across our hardware activities between our Mail-Related Solution and our Parcel Locker Solutions.

On the software — in the R&D activities related to software, we have now a centralized software engineering practice with one leader for it. So there’s a lot of things we can do across the 4 solution because they each leverage a software where we have the most intent and the most materiality on the reuse of R&D between the BPA software solutions and the Customer Experience software solution, where it’s the same IP, the same [cost] base that we have leveraged to actually adapt the solution from Customer Experience Management to the smaller and midsize customers leveraging our BPA practice.

On the — and the back office, this is really where coming from a holding company of — no, a myriad of independent companies to becoming one company. We’re leveraging more and more the same IT infrastructure, the same softwares, ERPs, CRM, HR team, finance team, HR to provide one support — integrated support organization to support all our employees and obviously all our customers in each of the regions that we operate into. So we have, obviously, countries in each regions coming together and our support environment becoming integrated. And then we have the sales and services, which I’ll discuss obviously a little bit more in the next slide that we leverage, in particular, in our respective go to market.

So if we go Slide 11, I want to give you some examples of the potential of the synergies, some that we have already developed in 2019 and the potential we have, obviously, moving forward. So when I talk about the sales organization, we cannot talk about sales without talking about our customers and the customer base. So a few examples is that in each of the region where we have now a more coherent sales management of our portfolio of solutions, we’re leveraging either low-hanging fruit synergies on specific customer segments or specific bundle or cross-sell opportunities.

If we take the example on Business Process Automation and Mail-Related Solutions, right, we are now developing campaigns specifically or we have developed campaigns in ’19 to bundled the offering of our BPA process automation solution related to our hardware on Mail-Related Solution. And that is in particular true for our folders and inserters in our BPA solution, which is called OMS-500. As a example of the achievement, today, we have doubled in 2019 the attachment rates of the software solution that we have on BPA with other hardware around folders, inserters across the world today. There’s been a strong focus of the sales teams on that.

Also, and I think I’ve shared that with you, we are having the self-commission plan, for example, in France of the entire sales team where they have now for each sales individual a target on BPA for commissions and a target on Mail-Related Solutions, 50/50, which means obviously that we’re reducing the customer acquisition cost to both acquired Mail-Related Solution customer as well as acquiring a new Business Process Automation customer. And roughly, we have 2/3 of — or 70% — around [30%] of our BPA customers today that are Mail-Related Solution customers. So strong synergy here.

If we go on Mail-Related Solution and Parcel Locker Solution sales channels, if we take the examples on the corporate side of all our SME customers that are using our Mail-Related Solution customers and we started to work on one of those segments, which is the education one, particularly for university, so if we look at the decision-makers, the decision-maker of a mail room at university is the same decision-maker than the one we have for our mail-related solution equipment, okay? So we’re sending the same sales person from our existing MRS sales channels to be able to cross-sell the parcel locker. We have now a 60% market share in the higher education segment of universities in the U.S. which has continued to increase in the last 2 years. And that’s definitely the result of our cross-sell activity.

If we took — if we look at another synergies that we have between our Mail-Related Solutions and our Customer Experience Management solution, if we look at, for example, a segment, the print service providers, right, and large accounts, definitely, we have opportunity to be able, with the same sales, the same penetration as we’re giving customer, to sell them our software and our mail-related equipment, in particular on the high end of our mail-related equipment for the production mail, what we call the DS-600 and DS-1200 as an example.

Just a few facts. In 2019, 16% of the revenue of Customer Experience Management in North America was generated by the sales channels of our Mail-Related Solution team, okay? In France, if we look at the customers that we have jointly between those 2 teams, there’s 56 customers that are joint Mail-Related Solution customers and Customer Experience Management customers. So just wanted to give you those few examples because I think they are obviously relevant, what we have put in place and the result and the achievement we achieved to leverage those sales and customer synergies.

We go Page 12. This is a stronger, obviously, asset of our company today. We have 500,000 stronger customer base, mostly customers that are small and midsized customers but not only, also large customers. We have provided large organization with both Mail-Related Solution and Customer Experience Management solution. And on top of it, we have as well top-tier carriers and retailers with our Parcel Locker Solution. I’m not going to go through the fact that we’ve been recognized by experts strongly about — some analysts like Gartner, Forrester, et cetera, and IDC across the board. And this customer base will go back for it too and also well-diversified geographically across 29 countries and the 2 main regions we operate into our Major Operations.

We go Slide 13. We have deployed a corporate and social responsibility strategy that is in line with our business. It meets both environmental, social and societal challenges that we’re facing today. But to achieve those objectives, our CSR strategy is built around 4 pillars. People. Our ambition is to continue improving working conditions, enhancing professional skills for our staff and in particular also promoting gender diversity. This is something that we have addressed head-on in the last several quarters and years now, to be able to increase the numbers of women that are managers in the company. We have made tremendous progress in ’19 versus ’18. We have a long way to go still. We’re in an industry where there was a lot of — male representation was pretty strong. But the organization has worked together putting different programs in place to be able to achieve — to get those achievements.

In term of ethics and responsibility, we have a defined ethical standards that we wish to encourage internally, obviously, among all our employees. And it is part of the dialogue we have with our external stakeholders on a continuous basis. In ’19 we have also worked on the certification of more of our sites to get a pretty high standard of quality certification that is the ISO 27001 certification, and we have now 5 sites from the 3 year previously. So it’s been — we’ve been pretty good on that front. And I would not under — I want to underline also the strong focus we have on security. We have now completed more than 25 of those security audits across the board in ’19.

I think one key element that is, I’m sure, of keen interest for you also today is that the design of our solution and services are aimed at developing the best customer experience obviously, but by offering innovative, secure and, most importantly, sustainable solution. In terms of sustainability, we have a unique remanufacturing program we have initiated several years ago as part of the design of the hardware, and it was embedded into it which in place is allowing us 32% of the hardware product placed on the market to be issued from remanufacturing.

So as you can see on this slide, our Quadient CSR initiatives have been recognized also by a number of well-established and extra financial rating agencies. We’ll be happy to respond to any of your questions on the topic at the end of the presentation.

If we go page — Slide 15, moving — yes, moving to our financial performance now. In these steps, we are — as you could see, we have achieved all of our financial targets. We said we would do, we would say, both in terms of organic revenue growth, current EBIT and free cash flow conversion.

Let’s move Slide 17. So we recorded sales of EUR 1.142 billion which is in terms of reported growth, 4.7%. As already mentioned, this represents an organic growth of 1.6%. So roughly a substantially improved performance compared to the last 4 years. If you remember, ’17 — ’16, ’17 of around 2% decline. We have stabilized the revenue in ’18. And now in ’19, we have achieved a marked up step up at 1.6% organic growth. And I just want to reemphasize the fact that we have now 7 quarters of organic growth in a consecutive manner that we have delivered.

Slide 18. Our 2019 performance, right, I believe if we talk a little bit about execution, validate strategic choices that we made as part of Back to Growth. But I think aside of the strategic choices, what has been key is the quality and the discipline and the execution. We will not have been able to achieve those results without a strong focus on execution. So I have already mentioned the change to our organization. This was completed by the renewal and the strengthening of our management team all along since the end of 2018, strong year the beginning of 2019, but also recently, with the hiring of new managers with international background and, in particular, with the appointment of a COO, Jean-François, our former CFO, became the Chief Operating Officer of the company; and the hiring of a new CFO, Christelle Villadary, which is with me today.

As far as our Major Operations are concerned, we made a number of investments in our go-to-market. We accelerated the innovation in the R&D. And we took a number of initiatives to enhance and develop the synergies among the 4 major solution. We, early in 2019, acquired Parcel Pending after a disciplined process. And we strongly focused to integrate Parcel Pending progressively during the year. We still have some work to go, but we’re well along. And we obviously also made some change in our supply chain. We’ll discuss a little bit about that. Even in 2018, we started to reduce our dependencies with our Chinese suppliers.

One key other element of our execution is to rationalize the portfolio of Additional Operation. So as you know, our goal there was to grow, improve or exit. And we have delivered and focused on the reshaping of this portfolio in ’19. Early on in ’19, at the beginning of the year, we sold Satori Software and Human Inference, our 2 subsidiaries dedicated to data quality. Six months ago, we decided to shut down Temando and the extension of this business is now nearly completed. And post-closing, we just made the divestment of ProShip for another $15 million. So overall, we have completed for more than $90 million of divestment. And in the meantime, we exited several loss-making businesses which has contributed to a significant improvement in terms of profitability for Additional Operation.

Slide 19. I cannot spend a little time on our highlights of 2019 without discussing and sharing the performance achieved by Parcel Pending this year. We’re very pleased with it. It was our first important acquisition, a bolt-on acquisition in the Parcel Locker business in the U.S., and the integration is well underway. We have seen an acceleration in the top line growth quarter after quarter. When you acquire small companies, it’s very important, as part of the process, to ensure you can keep the momentum of those businesses.

The installed base now has reached more than 3,700 lockers. We continue to invest in the go-to-market and to further support the growth as we still see some potential to be captured in this fast-growing and still nascent U.S. residential market. We have also looked at developing synergies, combining, in particular, the software and the product range of Parcel Pending with our own existing range. So we’ve done the analysis and we started to do some of the integration. This will continue in 2020 to ensure that we have a coherent product offer, an integrated product offer with the one from Packcity.

And we’re planning initiatives, right, to launch solutions in those — in new market segments. We have obviously done a lot of proof-of-concept in the retail segment in 2019. There’s obviously a different dynamic based on the subsegment of the retail industry impacted by the prices today that we’re going to be looking into, but also being able to look at other verticals. And in particular, we’re using the technology and the asset and the part of the project range of Parcel Pending outside of the U.S. into other key geographies for us. And just — we had a really strong team at Parcel Pending that has obviously helped us do those things together.

So let’s have a little focus now on our operational performance on Slide 21. As I have mentioned, the organic growth was a bit weaker in the fourth quarter due to a pretty high comparison basis with last year. Now on the other hand, we had an acceleration in top line growth in the fourth quarter in our 3 new solutions: 20% for Business Process Automation organic growth; 7.2% of Customer Experience Management versus the previous quarters, it was a Major Operation; and 44.1% organic growth to Parcel Locker compared to obviously the first 9 months of the year. And the decline on the other hand of Mail-Related Solution was a bit higher than in the previous quarters. But as you know, in the Mail-Related Solution, it is not a quarterly business in terms of looking at the trends. We need to look at it more on a yearly basis to appreciate the underlying level.

If we go Slide 22, we’re going to be able to have a little bit more detailed analysis for the full year on top line performance. Major accounts — sorry, Major Operation accounts for 22% of our total sales. And we had an organic growth of 0.6% (sic) [1.6%]. There are some very different dynamics in North America and our main European countries. I’ll come back to this in the next slide.

By type of solution within Major Operation, our 3 new solutions have completely and perfectly fulfilled their role of growth engine this year. Customer Experience Management maintained a good momentum with 6.2% organic growth with a strong comparison basis last year within Major Operation. Organic growth was much stronger in Business Process Automation and it was up 18.8%. And regarding our Parcel Locker Solution, which is more or less made of Parcel Pending, yes, organic growth stood for the year at a strong 31.2% organic growth. And in the meantime, we have Mail-Related Solutions that declined by 2.8%. And I want to stress that because that represents our best performance since 2013. So when we said we would focus on our core solution, Mail-Related Solution, and do better than the market, we meant it. Finally, Additional Operation, which account now for 17% of our sales, organic growth reached 6.7% and with some very different dynamics that we’ll as well come back to it.

So if we go now Slide 23. Customer Experience Management sales were up organically 6.2%, as I mentioned, with EUR 110 million of revenue. Revenue, I think, related to maintenance and professional services continue to increase as a result, obviously, of the sustained growth that we had in our customer base achieved in all the previous years. The license of a given year turns into a recurring revenue and the following on in subsequent years. And this is in line with our go-to-market strategy because we also have gained licenses. I told you as part of the strategy that we gain market share in our existing finance, bank, health and insurance markets so that we wanted to develop new verticals. In particular, we have picked utilities, government and telcos as a good potential for us. So seeing that we have already gained some additional license sales in those new verticals, notably in utilities and governments, we’re pretty happy because when you look at the sales cycles of 12 months, yearly speaking, by the time you hire in 2019 some salespeople, we’ve been able — happy to see already some track record this year with some key — good reputation customers. Another thing that I think is of notice is the revenue that is linked to our SaaS subscriptions has continued to grow significantly in 2019. The base is obviously smaller but the growth rate is mature — is appreciated.

If we look by geography, we had a pretty good performance in North America, including the signature of 3 large deals during the fourth quarter. In the main European countries, the level of activity remained pretty high, and — but the growth rate was lower, in particular, because this is where we have the high comparison basis versus last year. If you remember, we had signed our largest deal ever, in particular in U.K., in the fourth quarter.

If we go now to Slide 24. Business Process Automation sales were up 18.8% organically and stood at EUR 62 million within Major Operation. As for Customer Experience Management, the SaaS subscriptions went up pretty strongly, contributing to obviously a high level of recurring revenue which now stands at 78% of sales for Business Process Automation. We had some specific focus. I told you we’re trying to verticalize our go-to-market approach. In particular, we have done that job of identifying those several markets and specifying our marketing and campaign by segment, in particular, in the property management segment. We have maintained in France a very strong momentum as well as in the U.S., where we continue to gain a lot of new customers in particular by combining the offers as I mentioned earlier with the Mail-Related Solution. On the other hand, in the U.K., we recorded a decrease in license deals versus last year.

If we go to Slide 25, a few words on the Mail-Related Solution that were down organically 2.8%, roughly representing EUR 728 million. But as I explained, this is our best performance for years now. And this good resilience was largely due to North America, where we recorded a positive growth in sales. And we have — I want to stress that, have performed significantly the market here. Where the market was declining, we had a growth in North America. We had, in the U.S., a pretty good increase in hardware sales. And that is the result, in particular, I think of an optimized management of the installed base, which also turn — that led to a higher renewal of the leasing contracts. We also benefited from some cross-selling, thanks to the bundled offers of Business Process Automation solution. I think I’ve touched on that as well at the beginning. On the main European countries, mail-related activities continue to decline further but at a similar pace than what we had before, with one exception in Germany, Italy and Switzerland region for us where the decline was stronger. And the level of recurring revenue for Mail-Related Solution today remains high at above 70%.

Slide 26, on the Parcel Locker Solution, they were up 31.2% organically this year at EUR 43 million. And this is basically — essentially due to the sharp increase of Parcel Pending in the U.S. residential sector with an accelerated growth, again quarter-over-quarter. And we also had a double-digit growth in the smaller university segment in which we have a strong leadership position now.

Slide 27. So if we were to summarize, within Major Operation, we were up organically 0.6%. We saw sharp contrast between the North America and the main European countries. And this is reflecting the different trends in Mail-Related Solution, mostly, as we experience high growth of the new suite solutions on both sides of the Atlantic. And North America, in the end, was up by 5.6%, but the main European countries were down 4.7%.

Let’s move to Slide 28 for Additional Operation. So Additional Operation recorded a strong 6.7% organic growth. And this is due, if we look at the detail, to a 42% increase in Customer Experience Management in Asia Pacific and then the other European countries. In the last few years, we had difficulties in those other countries for Customer Experience Management. We have put, in ’19, a dedicated management team for Additional Operation to focus on each of its parts. And we’re very happy, obviously, and pleased with the good improvement in the performance of Customer Experience Management here.

And it’s the good performance of Additional Operation in 2019 is also due to the additional and further increase that we see in Parcel Locker Solution coming out of Japan, in particular, where revenue were up by 52% in ’19. So altogether, the sales of the remaining activities in Additional Operation went down and they were declining. The [special] much higher sales in the automotive packing system. Our grow, improve or exit, so we will focus strongly also in the improve and the grow. We sold 17 units in 2019 versus 10 in ’18. But the focus, obviously, for these mostly nonstrategic operation is really to improve the profitability within that operation.

So if we go on the financial 2019 review, I will hand over to Christelle, Christelle Villadary, our new CFO, at Quadient. Christelle?

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Christelle Villadary, Quadient SAS – CFO [3]

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Thank you, Geoffrey. Good morning, ladies and gentlemen. So I’m going to switch to Slide 30. So here is the snapshot of the 2019 performance. So Quadient, as we already discussed, recorded sales of EUR 1.143 billion, growing 1.6% organically and record an EBIT of EUR 185 million, in line with our indication.

So as you can see on this slide, both Major Operation and Additional Operation contribute to the growth and profitability of the group this year. So first, Major Operation, which accounted for 83% of the group revenues, recorded an organic growth of 0.6% driven, as Geoffrey explained, by the excellent performance of the 3 strategic solutions, which were more than offsetting a limited decline in Mail-Related Solution.

From a geographical standpoint, as you can see as well, North America had a very strong performance, plus 5.6% organic growth in all and each of the solution, whereas the decline, sorry, in the Mail-Related Solution, plus the strong comparison basis weighted on the performance of the main European countries which recorded the decline of minus 4.7% in terms of top line. Major Operation recorded an EBIT of EUR 181 million which is in line with our expectation.

As part of the Back to Growth strategy, you know that the group continuously implements strong measures to improve the performance of Additional Operations. So here you see the sales were out EUR 199 million which represents a very nice 6.7% organic growth for the year notably thanks to the Customer Experience Management activities and the Parcel Locker Solution in Japan. But more importantly, we saw a significant margin improvement versus last year. As you can see, the Additional Operation recorded an EBIT of EUR 4 million, whereas it recorded a pro forma EUR 12 million loss last year.

So moving to Slide 31. Now looking at the performance of the group in terms of profitability. So after excluding the scope effect as well as the icon earn-out reversal, which impacted, as you remember, favorably the 2008 EBIT for an amount of EUR 7.5 million, the pro forma EBIT 2019 (sic) [2018] amounted to EUR 188 million to be compared with the EUR 180 million in 2019 at constant exchange rates. This variation reflects in fact 2 things. On one hand the increased resource and is deployed in Major Operations to support the acceleration of the growth in the different solution. As you remember, an envelope of EUR 15 million was to be allocated to strengthening the sales team on marketing activities including for Parcel Pending as well as some increase in the R&D innovation expense.

It shows as well the decline of the high-margin Mail-Related Solution in our SaaS. But on the other hand, you see the values reflect the significant improvement by EUR 15 million in Additional Operations’ profitability, thanks again to the growth in revenue of our Customer Experience Management sales in the rest of the world and the Parcel Locker Solution in Japan. It’s also the result of a cost reduction program measure to increase our sales efficiency, and we also reduced R&D expense for the nonstrategic activities. It’s also the result of the decrease of Temando losses as the shutdown took place in 2019. We — it should be noted as well that we benefit from a favorable ForEx impact amounting to EUR 5 million. So the current EBIT margin reached 16.2%, slightly impacted by the mix effect resulting from the decline in the high-margin Mail-Related Solution and the increase in the 3 new strategic solutions.

Moving to Slide 32. So the group recorded in 2019 net results, net income of EUR 14 million and was mainly impacted by the write-off of the goodwill associated with the nonstrategic activities of the Additional Operation. So those write-offs and the associated operating expense amount to minus EUR 83 million this year. It relates mainly to the impairment of almost 100% of the goodwill relating to the nonstrategic activities within our Additional Operation for EUR 17 million.

Where impacted by this write-off, the activities of the Nordic countries essentially comprising graphics and mail-related activities; Australia, also comprising mainly graphic and mail-related activities; and the small subscale activities of our legacy shipping software in France. As part of the Back to Growth plan, you remember that the strategy for Additional Operation is to improve, grow or exit these activities. So in 2019, I do believe a lot has been done to manage this Additional Operation. As already discussed, some of the activities grew very significantly. The case for the [same] and Parcel Locker Solution in Japan. The CBP improved as well with a significant growth in its top line. On the other hand in September 2019, the group announced a slowdown — shutdown, sorry, of Temando, and in February 2020, the divestment of ProShip for an amount of $15 million.

So regarding Nordics and Australia, we’d like to remember that most of the activity is related to graphics, which is obviously nonstrategic activities. We looked at the continuing declining outlook of the underlying market and noted the limited synergies with the rest of the offering. All this resulted in the write-off of the associated goodwill of those activities. Obviously, the group is still very committed to continue assessing the best option to maximize the value of those assets for the company and obviously the shareholders. The group recorded also a EUR 3 million charge due to the reclassification of ProShip as an asset for sale under IFRS 5 as well as EUR 5 million expense relating to the write-off of the — in the residual net value of the intangible assets which were recognized as part of Temando purchase price accounting.

As every year, we also had some expenses for the optimization of our structure for an amount of EUR 10 million as well as some acquisition-related expense for an amount of EUR 50 million which were in line with last year. So the operating income reached EUR 77 million in 2019 versus EUR 157 million in 2018.

During the year, the group also continued to manage the extension of its debt maturity and financing costs. So as you saw, the group launched 2 main debt issuance in 2019 in order to refinance some of its maturities, a Schuldschein private placement in May 2019 and a bond issuance in January 2020 for an amount of EUR 325 million. So the refinancing costs associated with those operation amounted to almost EUR 5 million in 2019, impacting our financial results. The taxes, on the other hand, reached a normalized level in 2019 as compared to 2018, which was hit by several one-offs, and notably the booking of provision related to a longer-standing tax dispute. So I have said the net attributable income for the year ’19 reached, at the end of the day, EUR 14 million.

Slide 33. You have here a snapshot from the detail of the expense relating to the write-off and the other decision, which impacted the Additional Operation segment in 2019. So we just would like to remind you that all those items, the goodwill impairment of the Nordics, Australia and legacy shipping software, the ProShip reclassification or the write-off of the net value of the intangible of Temando, are noncash items and do not impact our cash flow. At the end of the 2019 and post all those operation, the group has very little goodwill left in its balance sheet associated with the nonstrategic activity of the Additional Operation.

Moving Slide 34. So EBITDA totaled, in 2019, EUR 282 million. Excluding IFRS, this EBITDA would have amounted EUR 258 million. You can notice that we have a EUR 7 million increase in working capital, which is largely owed to an increased level of inventories in preparation for the company needs in 2020. It was also impacted by a slight increase in the receivable, but which is in line with the momentum of the activity at year-end. The group recorded also a decrease in its lease receivable at a slower pace than 2018, which is also the sign of the very good momentum we had on our leasing portfolio activities.

Interest and tax paid totaled minus EUR 82 million in 2019 from EUR 54 million last year. So Quadient was in 2018 — benefited, sorry, in 2018 from dividend tax repayment for EUR 13 million which is explained part of the variation. We also recorded a net cash outflow of EUR 6.6 million linked to the resolution of the tax litigation dated 2006-2008. So pretty long-standing tax — from a tax litigation and were also impacted by the cash out relating to the refinancing operation for an amount of EUR 8.7 million.

CapEx. Investments in tangible and intangible fixed assets are pretty in line with the guidance given during the announcement of the strategic plan and in line with last year. You remember that last year, the group benefited from a EUR 5 million subsidy granted by the Japanese government to roll out Packcity parcel locker in Japan. So in total, the group generated cash flow after CapEx of EUR 86 million, EUR 78 million excluding the IFRS 16, versus EUR 152 million last year.

So we believe that while the operating cash flow was very in line with the group expectation, in 2019, we decided to seize the few market opportunities especially on the refinancing side of our debt. So the operation in Q4, which had a EUR 8.7 million impact on cash of refinancing costs plus the additional EUR 6.6 million cash outflow, which was booked in fourth quarter 2019 which was linked to the resolution of the tax litigation, impacted our free cash flow. So excluding those 2 nonrecurring items and expressed as a percentage of current operating income, the cash flow after CapEx conversion rate reached the 50.3% during the year.

Moving to Slide 35. So just a snapshot on the CapEx to show that we have, this year, EUR 96 million CapEx spent. You know that rented equipment represent usually more than 50% of this CapEx, 52% this year. They are relating to the Parcel Locker Solutions activity in Japan, which is pretty dynamic, and the Mail-Related Solutions in France and the U.S. The development CapEx mainly relate to our R&D efforts to support our solution road map.

Moving to Slide 36, financial structure. So on January 2020, the net debt amounted to EUR 668 million, sorry, which is an increase versus 2018, but this increase is mainly due to the IFRS 16 impact which amount to EUR 81 million. Excluding this impact, we note that the net debt decreased by EUR 30 million in 2019. The leverage ratio ended stable at 2.3 excluding the impact of IFRS. And you remind that the net debt of the company is backed by future cash flows generated from the rental and leasing activities. And in 2019, the portfolio amount, at the end of the exercise the fiscal year, to EUR 933 million. Shareholders’ equity reached EUR 1.249 billion. And the gearing decreased to 47% shareholders, excluding IFRS, compared to 49% in 2018.

Moving Slide 37. So the company, as we already mentioned, was very active during the year in terms of liability management. On May 15, 2019, the group announced its successful raising of the equivalent of EUR 200 million for the Schuldschein private placement loan. This transaction, mainly intended to repay existing lines in 2019 and early 2020, allow us to extend the average maturity of the group debt under very favorable condition. On January 16, 2020, the group announced as well successful issuance of a new bond issue for EUR 325 million in anticipation of the refinancing of its 2.5% existing bond maturing in 2021. So the average maturity debt is no more than 3.1 year. The key point here is really to point out that the group benefits from a strong liquidity position with almost EUR 500 million cash on one hand and an undrawn credit facility of EUR 400 million maturing in 2024 without any major debt repayment during 2020. And we remind you that the portfolio of leasing will also contribute to the future cash flow generation as an additional source of liquidity.

So Geoffrey, I give you the floor for the 2020 information.

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Geoffrey Godet, Quadient SAS – CEO & Director [4]

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Thank you, Christelle. So let’s go Page 38. We’re definitely going to spend a little bit time together now on the information for 2020.

Let’s move to Page 39, just spending a little time with you to discuss how we decided to face the current health crisis. We have quickly adapted, I think, the organization now because we have focused entirely on our team’s health and safety, obviously. But we also have been ensuring that we could best support our customers and partners in terms of ensuring business continuity in that period of time. Since, I believe, March 16, all our teams across the world, who can work remotely, has been working from home since that time. We had a chance to really try to anticipate a few weeks before. The good news that I can report is that it is working very well for now the last 2 weeks.

The second aspect is that we are in a position to ensure continuity of service for all our customers. And actually, many things can be performed remotely including lead generation, most service, maintenance operation and, obviously, all the support of our back office activities. And even professional services activity, for example, for the implementation of Customer Experience Management, where we used to do it mostly outside before, have been able to kick off projects and kick off those projects virtually with the authorization of our customers.

So that’s the — that’s been the clear focus lately. And I think the earlier measures that we have taken has allowed us to have a smooth transition so far on that.

Christelle, if you want to go over operating model for Slide 40?

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Christelle Villadary, Quadient SAS – CFO [5]

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Yes. So Slide 40. So as we try to anticipate the consequence of the current crisis on our activity, we would like to start by reemphasizing that Quadient has a resilient business model and model which provides a good level of flexibility.

So first item, in terms of supply chain, the group has a relatively flexible cost based on the fact that the — we have a quite a huge amount of outsourcing of the equipment manufacturing, circa a 90% in volume of our mailroom equipment system and 100% in our automated parcel lockers are outsourced.

The second point mentioned and pointed out earlier by Geoffrey is, obviously, the level of recurring revenues from which the group benefits, representing 68% of the total revenues. We are mainly speaking here about our multiyear rental or leasing contracts and the maintenance and services associated to those contracts. However, we should note that the current containment measures could put at further risk a proportion of recurring revenue based on the volume-based contracts, ink supplies, and some of the professional services that we cannot perform remotely.

From a commercial perspective and in a period where we could be in a position not being able to deliver physically the equipment to our customers, we do have some option. We have the option to offer contract extension to our customers, meaning that we do not have to supply new machines, and obviously, the related positive effect, being a delay in the cash outflow associated with this sale on our side.

On the software side, Quadient is also able to offer and install remotely some of its solution regarding the Business Process Automation and the Customer Experience Management activities and is also promoting SaaS and cloud solution to its customers.

The client base, you know that Quadient benefits from a very fragmented and diversified customer base in various industries and geographies. And for a large part of our SME customers, the leasing, rental, invoices, expense represent really small tickets, tiny part of their general expense. So the risk of default is, according to us, quite widely spread.

And last, but not least, the group benefit from a high proportion of variable cost in its cost of sales given its outsourcing model and software businesses. That’s why we believe that we have some key levers, key assets to address the current situation.

If I move to Page 41, so what’s the situation today? Obviously, as Geoffrey pointed out, it’s very early stage, and we cannot draw any conclusion from the current situation. However, we have started to see a few impacts. So within our Mail-Related Solutions, for example, in countries affected by the containment measures, we started to observe some postponement of equipment deliveries and the reduction of level of on-site maintenance and demand for supplies. Some projects or leads started to be delayed in our Customer Experience Management business, and some on-site professional services started also to be postponed. But at the same time, we saw also some of our clients switching to digital and using virtual meetings to continue with us installing and developing a solution for them. As of today, the impact on our Business Process Automation was limited at this stage, and some clients are using our solution for the sending of the materialized mail, electronic storage and the automation of invoice management processes, which is pretty pertinent during this period. And for the Parcel Locker side where the U.S. activity has, at this stage again, hardly been impacted. Japan activity also was not impacted as of today.

Again, it’s very early stage to give a reliable assessment of the impact. It will also depend on how long the shutdown will last in the respective country as well as potential economic consequences and the recovery dynamic of this crisis. However, we have started to implement some measures and make sure that we are weapon-ready to respond to further changes in the dynamics. So from a commercial perspective, I just mentioned it earlier, we are able to offer to our customer base a different solutions, so lease or rental contract extension for the Mail-Related Solutions mainly. And we are also able to offer our cloud SaaS solution for BPA and CXM solution.

By anticipation, we also — we, however, decided to launch preliminary measures, which included hiring freeze, the stop of temps, contractors and outsourcing activities. Taking into account the level of inventories, on one hand, the group has already adapted its subcontracted equipment order in Asia as well. Obviously, we cancel all unnecessary expenses on one hand. To further variable our cost structure, partial work action are currently being triggered, with obviously the objective not to harm our client servicing operation. And we are looking at the possibilities offered by the various regulation. We will also look at additional initiatives to optimize our cost structure and preserve cash by reviewing our CapEx program and make some arbitrage.

So as you can imagine, the group will continue monitoring this situation extremely closely to be able to respond to any change in the situation and to continue adapt our operation on cost base. But at the same time, we will make sure that any arbitrage on trade-off we make is not — will allow us to take advantage of the economic recovery under the best possible condition when it occurs.

Slide 42. Just a reminder, one of the key aspects and key strengths is the financial position of the group today. So earlier this year, we continued to have some liability management activity. In February 2020, the group bought back an additional EUR 15 million of its 2.5% bond maturing in June 2021. So following this buyback, the outstanding amount of this bond is EUR 163 million. We also offer to some of our debt holder the opportunity to extend the existing investment Schuldschein. And as a result, we postponed and extend again the maturity of our debt. So post those transaction, debt repayment for 2020, sorry, will be only EUR 32 million.

So as of March 2020, to give you a little bit of update, the group benefits from a strong liquidity position. Level of net debt did not move versus January 2020. The cash remains stable, and our credit line, sorry, is still ongoing. So as discussed earlier, we should also take into account the fact that the debt is backed by our future cash flow coming from our rental and leasing contracts — portfolio, sorry.

So 3 important elements to take into account: the resilience of our model with the high level of recurring revenues, the flexibility embedded in our business model and in the cost base and the strong liquidity position of the group as of today without repayment debt in the coming months.

Geoffrey, I leave you Slide 43.

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Geoffrey Godet, Quadient SAS – CEO & Director [6]

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Thank you, Christelle. So to summarize a little bit this presentation, I want to finish on a few words summary points. First, I know we have put a little bit more information than usual, but we wanted to be as transparent as possible and share with you what we have seen last year, obviously, and since the beginning of the year.

You can appreciate that looking at the very dynamic developments of the related COVID-19 pandemic situation and the confinements in different countries and when you add to that the uncertainty coming from the economy in the coming months, naturally, we’re not in a position to give any indication for 2020 financial year as of today. The Board, to share on that, have decided to make a decision by the end of May for the dividend proposal related to the 2019 financial year, which will naturally be then submitted to the approval of our shareholders at the general meeting. And then obviously, consequently, the indication for 2022 as part of the Back to Growth plan are suspended.

So before I allow some time for all of us to be able to respond to your question and hear your comment, just a quick summary. We have a very high level of recurring revenue. We have a diversified and large customer base. And I think you heard also from Christelle, we have a strong liquidity position. We’ve got a solid financial structure, in particular, thanks to the specificity of the leasing and rental portfolio that we propose to our customers. But I think most importantly is that more — now more than ever, it feels to me that the portfolio of solution that we have is even more relevant, right?

We have solutions that will help with BPA digitize the business process of companies. So at a time where they have to work remotely, we think we’re in a good position to support them. When we talk about Customer Experience, at this time, even more than ever, being able as an organization, as a company to get your voice heard from your customer differentiates yourself from your competition. And having a mid-channel capability to be able to address that customer experience and user experience is critical. And on the Parcel Locker Solutions, well, obviously, the underlying drivers of the automation and reduction of cost of the last-mile delivery, we think, is also very relevant. And in particular, because those comp — those parcel locker provide an experience of being contactless, meaning that it helped those — the delivery person or the receiving person not to have any contact to be able to receive their parcel. So we feel that the strategy of Back to Growth is very relevant today and that we’re in a good track from that perspective.

So I will let you — leave the floor for the question and let Caroline summarize or share the questions that you have for us today. Thank you for your attention.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a question from the audio line, and it comes from the line of Nicolas Tabor from MainFirst.

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Nicolas Tabor, MainFirst Bank AG, Research Division – Analyst [2]

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The first one would be, out of the 68% of recurring revenue, could you give us an indication of how much of that revenue is already secured for 2020? That is, which one is not viable at all? So already SaaS services and, let’s say, leasing revenues that you know will come in over the next 12 months. And which part is more viable being, let’s say, either consulting services that can be postponed or consumables for the machines? Do you have an indication of that?

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Geoffrey Godet, Quadient SAS – CEO & Director [3]

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Okay. So I will take the question. Christelle, you can, obviously, add to it if you need to. The — as what both Christelle and I described for you our business model, you have seen that in our recurring model and recurring portfolio, we do have activities that are definitely more contractually guaranteed. We definitely like to extend obviously, and we have some that are obviously related to the use of those services.

And it’s difficult at this stage to understand on the usage portion what will be used and not use or if there is any particular slowdown. We have seen some reduction or some drop in some of the usage, for example, related to the ink naturally on the mail-related equipment. And we did have seen some — as you mentioned, some services potentially on the implementation either postponed or stopped at this time. Knowing that we have just a few days or a few weeks of being able to appreciate this, it’s difficult to know over a longer period of time, especially in the coming months, how they would do.

But on those elements that are potentially — based on the usage or that could be delayed, I think what we see is sometimes, based on each of the different category, they could represent 10% to 30% of those recurring revenue. So I think if we had to give it some ballpark, maybe around 20% of the total recurring revenue might be subject to those impacts.

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Nicolas Tabor, MainFirst Bank AG, Research Division – Analyst [4]

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So you mean 20% out of the 68% or, I mean…

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Geoffrey Godet, Quadient SAS – CEO & Director [5]

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Yes, 20% out of the 68%.

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Nicolas Tabor, MainFirst Bank AG, Research Division – Analyst [6]

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20% and 40% and 50%, right?

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Geoffrey Godet, Quadient SAS – CEO & Director [7]

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Yes, 20% of the 68%.

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Nicolas Tabor, MainFirst Bank AG, Research Division – Analyst [8]

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Okay. And if then I look at the delay risk because we said that there will be risk to postpone installation of hardware, but then when demand starts again and the clients say now you can come back, what is the risk for you to have a delay in the — in starting up the production again? Because I think you said you closed some plants in your press release. So what’s the risk here that you will have further delay on top of the, let’s say, confinement period?

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Geoffrey Godet, Quadient SAS – CEO & Director [9]

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Understood. So the same thing, it’s a difficult question to answer because, obviously, it’ll depend on the length of time those confinement measures could potentially last, knowing that by country, they haven’t started the same time and they may not last or end at the same time and then when we look at the hardware portion on the mail-related equipment and also related to the product itself. So we have 90%, obviously, as we have described, of the volume of our mail equipment that is outsourced today in Asia. So another high end equipment. It’s where they’re mostly being produced out of Europe. And the time from an order to delivery for each of those product category vary.

That being said, we did take into consideration the level of inventories we had globally, and we have obviously some decent level of stocks. And this is why based on that and based on some of the slowdown that we could see, we are considering partial unemployment measures for our factories and only for the production parts. So that would be the, I would say, the first steps related to our industrial footprint is the partial unemployment on the production side in Europe. After that, we’re like, at this stage, looking at keeping the dispatch and logistic activities to make sure we can continue to either deliver our machine to customers during the period of time or being able to support them based on the call that we receive for parts or replacements.

So we have also, in a preventative manner, decided to reduce, obviously, the orders coming from the supply chain that we have from our suppliers and their lead time from the moment we would place a new order. But the way we’ve done it is that we took into account the inventory level and look at the demand and make sure that as we look every day, every week in the coming months to see the level of demand and how our customers are — in each country are getting back to normal life, then we will have the possibility to reactivate those orders and the supply chain. So it will be a careful management. But I think this is the beauty of our model, is the flexibility that we have on that. So at this stage, I don’t see particular issue to make sure we could benefit from those delayed orders when they come back up.

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Operator [10]

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Our next question comes from the line of Patrick Jousseaume from SG.

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Patrick Jousseaume, Societe Generale Cross Asset Research – Head of Mid and Small caps Europe Research [11]

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Can you hear me?

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Geoffrey Godet, Quadient SAS – CEO & Director [12]

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Yes.

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Patrick Jousseaume, Societe Generale Cross Asset Research – Head of Mid and Small caps Europe Research [13]

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Okay, perfect. So I have 3 questions. First one is about CapEx for 2020. So could you give us some colors on what we should expect?

Second question, M&A. In your Back to Growth plan, you’ve got quite a big, significant potential portion coming from M&A. Do you or would you expect to postpone everything? What is your view about that?

And third question is about the default rate. So default rate is around 1% or was around 1% in 2019. If I remember well, 2008, 2009, 2010 default rate does not — did not increase so much. Do you have a — what is the situation currently? And how are you going to deal with your covenant on this default rate, please?

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Geoffrey Godet, Quadient SAS – CEO & Director [14]

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Okay. Thank you for those good 3 questions. I will take maybe the first 2, and then you take the third one, Christelle.

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Christelle Villadary, Quadient SAS – CFO [15]

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Yes.

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Geoffrey Godet, Quadient SAS – CEO & Director [16]

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On the CapEx, it is too early for us to be able to understand the level of CapEx we will have in 2020. What we’re looking at on the CapEx is, obviously, as you know, on a roughly EUR 100 million CapEx a year, 50% is related to our rented model and the leasing the equipment. And obviously, we have commercially the capability to extend contracts in some cases, which could in turn reduce the amount of CapEx that is — that would be needed this year. So that’s on that part.

On the second part, we have got some maintenance CapEx. This one will be more difficult to reduce. But on the 30% left that we had in 2019, they are related to strategic projects. So they’re fair game for us to be able to take seriously a consideration of each one of them and where we could find potentially some leverage to delay, if it’s possible, some of this project. But again, we need to make sure we don’t do anything that would jeopardize, from the question of Nicolas, our capacity to benefit from the recovery and making sure that in our product line in the portfolio solution, we are ready and we have all the modules and the product that we need. So that’s on the CapEx. Unfortunately, I cannot give you an idea of what it would be for 2020 at this stage.

On M&A, I want to be clear here as much as M&A is a key part of Back to Growth. At this stage, we’re putting a hold on everything. We need to remain very cautious. Situation is very dynamic. And I think it would be unwise to consider anything right now. That being said, we are looking at — we have been looking on the market, so we have relationship. We have matured opportunities and different capacity. There might be things that were not there before then we can come back later on. But I think it’s something we’ll see at a later stage. We’ll remain producing if that’s the case, but our intent today is to pause our M&A activities.

Christelle, you want to take the third one?

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Christelle Villadary, Quadient SAS – CFO [17]

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Yes. So regarding the default rate, as we discussed already, you know that we have — it’s — first of all, it’s extremely early stage to do any conclusion on that. And as of today, we have not seen any trends or any negative trends in terms of cash collection. We believe we have a very diversified customer base, as we said, in terms of geographies and industry. And we have a very fragmented customer base with very low ASP for our product and solution. So today, very difficult to understand if the default rate can increase or not. You were referring to 2008 and 2009 where the default rate, in fact, remained very stable. So we will provide you update as we see, but as of today, nothing major to note.

In terms of the impact on the covenant, as you will see and as you can see in the presentation, we have a lot of room of maneuver as of today versus this covenant.

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Patrick Jousseaume, Societe Generale Cross Asset Research – Head of Mid and Small caps Europe Research [18]

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I mean, sorry to come back on that, but that one that you have is on covenant regarding the debt to EBITDA. I was more speaking about covenant which is relating to the default rate.

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Christelle Villadary, Quadient SAS – CFO [19]

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Yes, which is 1% as of today versus the 5% which is the default rate. Yes, fully understood. So again, today, we do not believe we will reach that. It’s early stage to see how things will evolve in the coming weeks.

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Operator [20]

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Our next question comes from the line of Jean-Francois Granjon from ODDO BHF.

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division – Analyst [21]

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Yes. Jean-Francois Granjon from ODDO BHF. Three questions, please. The first one concerns the financial costs. So the strong growth last year, what do you expect for this year 2020?

The second question concern the Mail-Related Solutions. So we saw a higher drop during the last quarter by minus 4.4% compared to the previous quarter. So can you come back on this and the reasons for this trend?

And the last question, you mentioned the quite resilience of the business and recurring revenue, et cetera, et cetera. So why do you cut the target objective for 2022?

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Geoffrey Godet, Quadient SAS – CEO & Director [22]

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Jean-Francois, good question as well. I will take the second and the third one, and I will let Christelle take the first one, but I will start.

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Christelle Villadary, Quadient SAS – CFO [23]

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Yes.

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Geoffrey Godet, Quadient SAS – CEO & Director [24]

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On the level of Mail decline, as we have many times reviewed this topic and I share that consistently, the mail activity, quarter-over-quarter, you have so many differences from the different type of component of that business model from the leasing to the rental, the services, the rate change, the inks and all that. And by country, over the last 5 years, there’s been, obviously, different element of campaigns. That means that in a particular quarter, difficult to appreciate the particular trend and how is it reliable.

So my point is that the level of decline in Q4 is not what I’m looking at, and I haven’t seen in Q4 in our activity any change of trend and the dynamic that we have seen all over the year in 2019, in particular, for example, in North America, structurally. Okay? So in particular, in Q4, it’s always a pretty big quarter for us. In the last quarter, there’s always sometimes big deals, rate change and all that. So the conversion basis could be sometimes a little bit bigger or not compared to the previous year. So I haven’t seen in Q4 in ’19 any particular change so I think the overall yearly level is more relevant to the change of dynamic that we have seen from the previous year.

And in North America, in particular, in Q4, we’ve seen in the U.S. the same ongoing strong performance that we’ve seen before. But in Q4, we did have a very high comparison basis in Canada because there was a strike the previous years from the postal organization in 2018 in Q4 — Q3 with a huge catch-up in Q4 which created a pretty high comparison basis, for example, for the Canadian. So I know Canada was much lower in terms of performance this year in Q4 for us compared to last year, but hasn’t changed the underlying dynamic in North America. So that’s — I hope I addressed your point on that.

On the recurring revenue, yes, we benefit from that strong model, and it was a high level of recurring revenue. But the suspension for the 2022 guidance, as you know, in our plan, we have, obviously, an organic portion, but we have also a inorganic portion because we had dedicated an envelope of M&A for the duration of the plan. So not knowing at this stage when and how we will have the contribution of the potential acquisition that we were considering for this plan, I think it’s too early until we have that visibility to be able to confirm the guidance of the Back to Growth plan, right? So once we all have, first, a little bit more visibility in a way on the organic view, but also how the contribution of the M&A will contribute, we’ll be able to get back to the Back to Growth mid-term guidance and update them if needed.

And first question, Christelle, yes, go ahead, sorry.

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Christelle Villadary, Quadient SAS – CFO [25]

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So regarding the financial cost, yes, you were right, 2019 was impacted by the refinancing costs, and this will not come back in 2020. So we believe that the financial cost will be around EUR 34 million, including the IFRS impact of EUR 2 million — as IFRS 16 impact of EUR 2 million compared to the EUR 39 million we had this year.

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Operator [26]

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Thank you. There are no further questions coming from the audio line at the moment.

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Geoffrey Godet, Quadient SAS – CEO & Director [27]

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Caroline, could you tell us if you have received any questions from the webcast that you want to ask us?

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Caroline Baude, Quadient SAS – Financial Communication Specialist [28]

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Yes. We received 2 questions from David Cerdan from Kepler Cheuvreux. The first one on dividend. Why are you waiting for end May to announce your decision? A lot of company have already cut their dividends and such a decision is rational due to the context.

And second question regarding Additional Operation. Have you advanced negotiation on the disposal of some parts of this business unit, if the current crisis could impact the negotiations?

The floor is yours.

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Geoffrey Godet, Quadient SAS – CEO & Director [29]

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Thank you, David, for your 2 questions. So for the first one, what we’ll do is we’ll make a decision by the end of May. As you know, the dividend will take into consideration, as usual, mainly a consideration, but knowing anyway the current situation, I think it is only reasonable to be able to wait. But I don’t see that as a forgone conclusion. You’ve seen many customer — many companies to be able to maintain their dividend. Others have made a pause in the distribution. As it relates to us, I can only reiterate that we had a good 2019 year, on target with our plan. We have a strong liquidity position today. I think we’re going to take the time in the coming days, in the coming weeks to see how the situation is evolving. And I think we’ll be able to respond and address the dividend point before the end of May.

On the second question, sorry, what was the second question? On the Additional Operation, so the impact — so as I mentioned, we usually don’t provide comments on the M&A pipeline or divestment pipeline. Our strategy is to grow, improve and exit for Additional Operation. We have already divested a quite a number of business within Additional Operation. We’re obviously very happy with the performance of some of the activities and the improvement that they have made, both in terms of top line and bottom line, if we look at Customer Experience Management and the Parcel Locker business. But on the other — on the rest of the activities that are nonstrategic, the team in ’19 has also, obviously, focused on the improvement of profitability and also made group progress there. So that’s, I think, what I can say at this stage.

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Caroline Baude, Quadient SAS – Financial Communication Specialist [30]

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Thank you, Geoffrey. I have no further question on the webcast.

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Operator [31]

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There are no questions coming via the audio line.

(Operator Instructions) And we do have a final question from the audio, and it comes from the line of Martin Boeris from Exane BNP.

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Martin Boeris, Exane BNP Paribas, Research Division – Analyst of French Mid Caps [32]

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I have 3 questions, please. First question, can you give some details on the 3 large deals you signed in Q4 in Customer Experience Management, particularly in terms of client typology and offered solutions?

Second question, can you specify what the increase in general and maintenance costs in 2019 relate to?

And finally, why did you choose to fully impair the goodwill of your nonstrategic activities this year and not last year?

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Geoffrey Godet, Quadient SAS – CEO & Director [33]

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Christelle, do you want to take the third question on the impairment of goodwill?

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Christelle Villadary, Quadient SAS – CFO [34]

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Yes. So Martin, on the goodwill and the timing to recognize this impairment, obviously, when we look at the different outlook of the underlying market, especially in H2, we see that in terms of the graphic business and in terms of the performance of our own activities, we lost a few contracts in Australia and in Nordic. When we decided to look — redo our 3-year plan based on this outlook, we saw that the valuation we have in the books were not corresponding any longer to those items. So it’s not why we took it this year versus last year. It’s just that given the different trading and the different outlook we have on the business and the underlying markets in H2, it was the date at which we should recognize this impairment of the goodwill.

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Geoffrey Godet, Quadient SAS – CEO & Director [35]

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Okay. Yes. On the first question, top of mind, there were — we have 3 large deals that I believe were in the U.S. If I remember well, one of them was with Travelers, so a financial institutions. And I cannot remember — I can get back to you, Martin, on the other ones, and I need to check if we can give the names actually. But they were large institutions in the U.S.

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Martin Boeris, Exane BNP Paribas, Research Division – Analyst of French Mid Caps [36]

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Okay. And I just wonder in terms of solution. Were they cloud-based solutions or more traditional solutions? Just to care — review, it was more CCM or CXM solutions? Just to have a sense of a…

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Geoffrey Godet, Quadient SAS – CEO & Director [37]

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So they were CCM solutions today because they were our new customers, if I remember well on those large deals. The CXM is also the add-on of those digital modules that we have, like interactive. We have released only at the end of the year or actually beginning of this year, the R14 release, which included also significant additional capability from a cloud perspective, and that really the first big release that allows the Customer Experience Management capability.

Thank you for those questions, Martin.

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Operator [38]

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Thank you. There are no further questions coming from the audio line. So I’ll hand the call back to our speakers to conclude today’s conference.

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Caroline Baude, Quadient SAS – Financial Communication Specialist [39]

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I have one question that arrived on the webcast from [Roland Curian].

Can you give a rough overview of your goodwill position, which business segment and region? And where do you see higher risk in the current situation if COVID-19 will be no longer than currently up — will be longer than currently up? Sorry.

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Geoffrey Godet, Quadient SAS – CEO & Director [40]

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Christelle, can you take this question?

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Christelle Villadary, Quadient SAS – CFO [41]

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Yes. So on the goodwill situation, first of all, on the additional operation side, as said, we have no longer a goodwill associated with the nonstrategic activities of this Additional Operation, remain a small amount related to the CXM part of the business, which you understood was quite dynamic and quite positive during 2019.

In terms of goodwill associated with Major Operations, we still have EUR 1 billion of goodwill, which is spread across the different geographies. You have in the — you will have in the financial accounts this detail. Basically, a part of — big part of it in North America, France, Benelux.

U.K., Ireland, they got EUR 150 million; Germany and DACH region business, EUR 150 million; EUR 400 million for North America; and France, Benelux, EUR 200 million. All those goodwill are supported by strong cash flow generation based on the 4 solution. So today, we do not see any risk associated with those goodwill. We performed our impairment test and looked at the business plans of all those activities. The COVID 2019 — ’18 — ’19, sorry, impact is extremely too complex to understand what will be the impact on the goodwill. But given the room of maneuver we have on the valuation of the underlying businesses, we do not see any issue at this stage.

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Caroline Baude, Quadient SAS – Financial Communication Specialist [42]

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Thank you, Christelle. I have no further question on the webcast.

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Geoffrey Godet, Quadient SAS – CEO & Director [43]

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Wonderful. So I want to thank all of you for your time. We took a little longer, and we were happy to be able to respond to all of your question. We look forward to continuing the discussion with some of you later.

Thank you very much. Thank you, Christelle. Thank you, Caroline.

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Caroline Baude, Quadient SAS – Financial Communication Specialist [44]

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Thank you.

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Christelle Villadary, Quadient SAS – CFO [45]

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Thank you. Have a good day.

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Operator [46]

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Thank you for joining today’s call. You may now disconnect. Hosts, please stay on the line and await further instructions.

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